The SEC has intertwined various XBRL tagging questions within the 46 questions asked in its Request for Comment on Earnings Releases and Quarterly Reports. The 46 questions focus on the two communications that U.S. companies utilize to disclose their quarterly financial information – the Form 10-Q and the earnings release. However, the SEC requires that only one of those documents, the Form 10-Q, be tagged with computer-readable XBRL. This creates a situation whereby various changes, as contemplated in the SEC request, will need to consider the implications to XBRL-tagged data and the increasing number of investors that rely on it.
Earning releases – should they be tagged?
It is perplexing that, although quarterly financial information is provided using a combination of the earnings release and the 10-Q, only one must be tagged using XBRL. It seems if one is worthy of being tagged, the other should be too. A key reason that only one must be tagged is the initial SEC tagging requirement for periodic reporting didn’t go beyond US GAAP taxonomy information. And it’s the 10-Q that comprehensively contains the US GAAP quarterly disclosures. So, the initial requirement, which still exists today, is to only tag the 10-Q.
However, as SEC tagging requirements evolve, one can easily argue that all periodic financial information disclosed by a registrant should be tagged, and this would include disclosures in the earnings releases. One of the SEC’s 46 questions directly addresses this issue, “Do the XBRL requirements of Form 10-Q enhance accessibility and/or usability of quarterly information relative to what is available from earnings releases…?” The question continues with, “Would similar benefits be achieved if companies structured earnings releases using XBRL?” There has been much debate on whether earnings releases should be tagged. This is the first time the SEC has directly requested public comment on it.
There are other factors to consider in determining if tagging the earnings releases is feasible, one of which is timing. A registrant’s process for creating the earnings release is time-constrained. Adding the step of tagging the information would add time to the process. To mitigate this issue, tags can be selected well in advance (many have already been selected in the 10-Q) and disclosure management software can be used to improve the accuracy and efficiency of tagging. Timing usually enters any conversation about tagging earnings releases, and is an item that must be considered.
The burden of duplicate information – XBRL can help
The 10-Q and the earnings release contain similar information and frequently some of the information is duplicated in the two reports. One of the SEC’s 46 questions is whether there are “unnecessary burdens to investors or other market participants associated with reviewing, comparing, and digesting two presentations of similar financial information.”
For an analyst that isn’t consuming the information using the XBRL-tagged data, yes, it’s likely there is a burden of determining which items from the earnings release are repeated in the 10-Q and what information is new. But if the earning release is tagged and the analyst is consuming the information using the XBRL-tagged data, then it is easy to discern what information is duplicated in the 10-Q, or what information is new. A quick search of tags in the 10-Q will show that some of the tags are the same tags as used in the earnings release. For each of those tags, it is clear that the related information is duplicated in both reports.
And, if a tag is used in the 10-Q but isn’t used in the earnings release, then those tagged items are new information in the 10-Q. Likewise, if a tag is used in the earnings release and doesn’t appear in the 10-Q, then it’s easily discernable as a disclosure that management chose to present only in the earnings release. XBRL consumption of the two documents quickly reveals what is separately disclosed in either document or duplicated in both.
Supplemental Approach has XBRL implications
The SEC also asked for comments on the possibility of a Supplemental Approach, where the registrant can use the 10-Q just to supplement a Form 8-K earnings release (i.e. the 10-Q wouldn’t need to include information traditionally included in a 10-Q if the information is already presented in the Form 8-K). If this were to occur there would need to be a rule change to the XBRL tagging requirement, at a minimum, to require tagging of those disclosures that were traditionally in the 10-Q. Investors are increasingly using XBRL data and removing many US GAAP disclosures from the tagging requirements would decrease the efficiencies created by consuming computer-readable XBRL data.
Answers to the 46 questions
Due to the SEC’s formal process, it will be a while before any contemplated changes would possibly be adopted. But during that process, input regarding the ability to consume financial information in a computer-readable format will impact the changes to quarterly reporting and, similarly, input on the changes to quarterly reporting will impact the content and timing of what gets tagged in XBRL.
If you are interested in the public’s answers to the 46 questions, and related comments, see the public comments which are posted on the SEC website.