What percent of disclosures in the primary financial statements of SEC registrants are unique to the company? According to a recent SEC staff analysis, the answer is 9% for U.S. GAAP filers and 16% for IFRS filers.
What is a unique disclosure?
How do you define a unique disclosure? That’s easy. SEC reporting requires tagging of each financial statement disclosure to the appropriate XBRL element (or tag) from a standard list of tags (the taxonomy). However, when a company has a financial disclosure for which there is no tag in the standard taxonomy, the company is required to create a custom tag and report the disclosure as a custom item. So, unique disclosures are those disclosures submitted to the SEC that are tagged with a custom tag in the XBRL financial statements.
SEC Staff analysis
The SEC’s analysis, showing the 9% and 16% figures, was performed by the Division of Economic and Risk Analysis (DERA). The analysis was based on submissions of XBRL annual reports for 2017.
In previous years, the SEC’s DERA staff performed similar analyses which showed the rate of custom tags in XBRL financials. However, the previous analyses included tagging of the notes to the financial statements. As such, the percentage of custom tags in previous years was higher than in the recent analysis of 2017 annual reports, which just included the primary financial statements. This increase makes sense. The likelihood of custom disclosures is higher in the notes to the financials, since the notes are more detailed and are often more specific to the company. The SEC staff’s previous analyses showed custom tag rates of 19%, 19% and 18% for annual reports submitted to the SEC during the years 2015, 2016, and 2017, respectively.
U.S. GAAP versus IFRS
The recent SEC staff’s analysis for 2017 annual reports separated IFRS financial statements from U.S. GAAP financial statements. According to the SEC, this was done “to discern whether IFRS filers, in their first year of required XBRL submissions, were being consistent in their use of custom tags with other filers, or whether their use of custom tags diverged from other filers.”
The custom rate of 16% for IFRS filers was much higher than the custom rate of 9% for U.S. GAAP filers (78% higher). The SEC staff didn’t elaborate much on this difference. However, I can shed some light on why this is the case:
- This was the first time that IFRS filers submitted XBRL to the SEC. This means that XBRL was new for these filers and, possibly, they weren’t proficient at selecting tags yet. So some filers unknowingly (and erroneously) may have created a custom tag when there was an appropriate tag in the standard taxonomy. This reasoning is rather illogical since it implies that a company would actually submit an erroneous disclosure to the SEC, under the assumption that the error is okay since it’s the company’s first year of XBRL filing. That’s not a good argument, unless the company wants to suffer the wrath of investors and the SEC. I checked many filings to see if this was the case and, unfortunately, I found too many situations where a company did use an unnecessary custom tag when an appropriate tag existed in the IFRS taxonomy. Not good. So this is a portion of the percentage increase of custom tags from U.S. GAAP to IFRS. And let’s hope these filers promptly get the appropriate help to do their tagging the right way.
- This was the first time that IFRS filers submitted XBRL to the SEC (same reason as #1 above, except…) The first year of IFRS filings means it is the first time the creator of the IFRS taxonomy (the IFRS taxonomy team) has had a significant amount of XBRL-filed data available to see which disclosures are frequently reported as custom tags. Once these are identified, if appropriate, the tags can be added to the IFRS taxonomy to reduce the rate of custom tags in subsequent years. The taxonomy team for U.S. GAAP filings, on the other hand, has had several years of XBRL-filed data to examine. And currently the U.S. GAAP taxonomy has about 16,000 tags versus 6,000 in the IFRS taxonomy. As a member of both the IFRS Foundation’s and the FASB’s taxonomy advisory teams, I have worked with each group to add tags to the taxonomies for “common practice” reporting items (meaning the disclosures are commonly reported, but aren’t a specific requirement of the accounting standards). The IFRS taxonomy team has added some common practice tags in the past, but now will be able to identify and create additional tags since there is a more comprehensive set of data to examine.
- Another possible reason is that, regardless of XBRL tagging, the IFRS standards simply require companies to report more unique disclosures than the U.S. GAAP standards. The jury is out on whether this is the case, and whether it is a large or small portion of the increase from 9% to 16%. As the two standards have become more converged, this reason should become less impactful. But for now it is a reason that can’t be counted out for a portion of the difference in the custom tag rates.
Bringing clarity to unique financial disclosures
If you’re an SEC registrant, why do you have unique disclosures on the primary financial statements? Are they beneficial or problematic? Does your percentage of unique disclosures approximate the numbers in the SEC staff’s analysis? Which category above applies to each of them? (Hopefully none of them fall into category #1.) Answering these questions will bring more clarity to unique disclosures.
And I am already curious…what percentage of custom tags will be in next year’s SEC staff analysis, for both U.S. GAAP and IFRS filers.
By, Lou Rohman, Vice President, XBRL Services