A recent SEC analysis indicated that 18% of financial statement disclosures are unique to the reporting company. This percentage is higher than what I would expect since this means that, on average, for every five to six US GAAP financial disclosures, one of the disclosures is unique to the reporting company. That’s a substantial amount of disclosures that aren’t comparable across companies, especially considering that all the disclosures are being reported in accordance with the same accounting standards. Why is this occurring?
The SEC analysis
The SEC analysis covered filings of US GAAP annual reports submitted to the SEC during 2018. It used the XBRL financials to identify each company’s use of custom tags. Custom tags are created by the registrant when there is no appropriate matching tag in the US GAAP Taxonomy for the given disclosure. Consequently, these custom tags are considered unique disclosures.
The analysis showed the rate was 19% and 18% for 2016 and 2017, respectively, so the rate is stabilizing at approximately 18%.
Why isn’t the average rate lower than 18%?
If every registrant is following the same accounting standards, wouldn’t the unique disclosure percentage be lower than 18%? The experience of our seasoned XBRL team at Toppan Merrill from tagging and reviewing thousands of XBRL financials points to three significant factors that increase the rate of unique disclosures, which are:
- The financial disclosures included in the SEC analysis include not only the primary financial statements, but also the notes to the financials. The notes include many disclosures that are very specific and explain items in significant detail, which increases the likelihood of custom tags. And since the tagging requirement states that each amount be tagged (i.e. each monetary value, percentage, and number) the level of tagging goes beyond just the basic monetary values. The SEC did an analysis of the custom tags in the primary financials (excluding the footnotes) of US GAAP filers in 2017 and determined the rate of custom tags was 9%. Even that isn’t a small percentage, but it shows that the notes contain a lot of custom tags due to the increased detail within the notes.
- Certain financial disclosures, although in accordance with US GAAP, describe unusual or complex circumstances that are specific to the company. Many of the amounts in these disclosures are not in the US GAAP Taxonomy since they are not specifically in the accounting standards or aren’t commonly reported. Examples are:
- disclosures related to complex debt and equity structures, especially if it involves special debt covenants
- commitment and contingency disclosures, especially if they describe unique legal matters and
- disclosures of unusual transactions, including collaboration agreements with third parties.
When these disclosures present unique concepts, the custom tag rate increases rapidly.
- Unfortunately, sometimes a unique tag is erroneously created by a registrant when an appropriate tag exists in the US GAAP Taxonomy. This happens when the preparer is unfamiliar with the taxonomy. It also happens when the preparer is unaware that a custom tag which was properly selected in a prior period has been added by FASB to a new version of the taxonomy. Once the tag is added to the taxonomy, in future periods the preparer should replace the custom tag with the new tag.
Preparers and consumers can enhance comparability
Unique disclosures, although appropriate, reduce comparability across companies. The SEC stated in its analysis, “the Commission has acknowledged that the use of unnecessary customized tags could potentially reduce the comparability of inter-company data.”
To enhance the ability to compare the unique financial data across companies, both users and preparers of XBRL financials play a role.
The users of XBRL should understand two upcoming enhancements to help compare unique disclosures. One enhancement is a mechanism introduced by the European Union XBRL mandate that requires any custom tag to be anchored to a related base taxonomy tag, thereby giving the custom tag more meaning. Another enhancement is an upcoming change in the way the XBRL standard handles calculations, which will give more meaning to custom tags that are included in an XBRL calculation.
The preparers of XBRL also play a role since they need to closely analyze the custom tags they are submitting to the SEC to determine if they are truly unique disclosures. In addition, preparers should be familiar with each annual version of the US GAAP Taxonomy to determine if any new tags have been added that appropriately replace a previous custom tag that the company created. The FASB taxonomy team frequently evaluates the custom tags to determine if any new tags needed to be added to the taxonomy. Consequently, due diligence from XBRL preparers is required.
There’s always next year
I expect the SEC will prepare the same analysis next year on all the 2019 filings. I am curious to see the result… although my expectation is that the custom tag rate will stay very near 18%.