Famous Dave's CFO Paul Malazita says financial executives should start getting comfortable utilizing XBRL data now.
This month, the staff of the Division of Corporation Finance of the SEC provided interpretive guidance on the new inline eXtensible Business Reporting Language (XBRL) and related exhibit requirements.
FEI Daily spoke with Paul Malazita, CFO and Principal Accounting Officer at Famous Dave's of America about how his organization is using XBRL data for benchmarking and valuation analysis and the benefits of correctly tagging information.
FEI Daily: Tell me about your role and your relationship with XBRL.
Paul Malazita: When I went into public accounting, the interactive data mandate was just coming about and the largest companies already had to comply. Some of the smaller and middle market companies didn't quite know how they were going to do this because it was a big lift for them to get set up and understand how to tag and all of that data.
There was a partner at the firm I worked for who thought this could be a nice little business for our firm. So he started the business line and sold it to about 60 clients that we helped comply with the first and second wave: block tagging and detailed footnote tagging. Then, after we got the initial compliance done, continued on with some of those companies to maintain and update their quarterly XBRL filings.
It was something that wasn't on my radar, but I was given the opportunity to join this team. That partner departed the firm suddenly, and there was nobody else who had the expertise that I did around building these XBRL filings and making sure that our public company clients were going to continue to comply every quarter. It was a nice opportunity for me to really understand how financial statements work.
After I left public accounting, I went into a career in financial reporting with public companies and that's how I got to Famous Dave's. I joined doing corporate accounting and financial reporting, became the controller and then, when our CFO departed a couple of years ago, I became the interim CFO and, finally, the permanent CFO. So my career really has its roots in an XBRL.
FEI Daily: Some financial executives view XBRL as an extra step in the disclosure process that simply checks off a regulatory requirement box. As a CFO of a publicly traded company, what do you make of that perception?
Malazita: I believe it's a valid perception because the benefits of XBRL have not been well-communicated to companies and the data generally requires software to consume. In an era of increasing input cost and expectations of the street to increase profitability, I think that the cost benefit of consuming this data is a little bit misunderstood.
There's also a lack of data that is actually tagged. Companies communicate a wealth of information in their 10-Q, 10-K, 8-Ks S-1s, press releases, etc. to help the user understand their business and telling the story of what happens in the numbers and where they're going to go from there, but the tagged portion of the financial statements is really just the US GAAP portion. They certainly provide a lot of information about what happened at the company in the past, but it's incomplete, in my opinion. There are also a lot of non-GAAP metrics used by each industry that are very important to analysts and investors in those industries that aren't tagged because the taxonomy is really just US GAAP focused. That limits the usefulness of XBRL tagged data.
There has also been very little enforcement surrounding errors and consistency issues by the SEC. Auditors are not required to perform any procedures surrounding XBRL. And so I think, until companies are truly incentivized to put the same efforts into their XBRL as they are the rest of their documents, it's going to struggle to catch hold.
FEI Daily: What is your experience using XBRL data for benchmarking and valuation analysis?
Malazita: We’re working with a third-party company right now to use their software to build out a peer set of companies with certain metrics that we look at in the restaurant industry for the purposes of setting up templates and data for when we perform our annual Goodwill impairment analysis. It also helps us to understand certain transaction multiples. We pay close attention to what's going on in our industry. Why certain brands traded at different multiples is not necessarily apparent at the outset.
Being able to use XBRL data to normalize the company, looking at the strength of their balance sheet, the strength of their revenues, their profitability metrics, things like that, really starts to get a sense of what our company is truly worth.
We're a public company. But, oftentimes, there is intrinsic value that might not be captured by the market. As we look either into acquiring other companies or what we look like in the market, using XBRL data is extremely helpful in being able to do those analyses.
FEI Daily: How do you ensure your XBRL (and now Inline XBRL) filings are valid and have the highest possible quality?
Malazita: When I first got to the company, I took a hard look into what was in our XBRL filings. I made some changes to extended elements that might not have been replaced with standard elements as taxonomies get updated.
I also took a look at how our 10-Qs and 10-Ks were structured and started to use more tabular style disclosures, rather than things in narrative, to make it a little bit easier to present data within XBRL and make it easier to tag, rather than having three or four paragraphs explaining the same thing, but just in different time periods. Only having to tag that table one time and update the dates, that made it a lot easier and I believe our filings to be a lot cleaner.
In the past several quarters, we outsourced that and started working with a third-party that not only pays attention to what's going on in our business and what changes are happening within the XBRL taxonomy, but also runs our files through the XBRL US data quality checks, does analysis of how our filings render to make sure nothing is looking crazy. Perhaps if we had an inconsistent decimal point issue, things like that. Just to make sure that what we're putting out there is truly of the highest quality.
FEI Daily: Does management, your auditor, or your board know about XBRL? As a CFO, how do you share what you know about the creation and consumption of XBRL with them?
Malazita: They know about XBRL but it’s certainly not at the top of mind for discussion during our board or audit committee meetings. When we're discussing our annual filings, many of the documents and analyses that they receive, such as our impairment analysis, diligence for potential acquisitions, things like that, have roots with XBRL tagging, but we aren't having quarterly discussions surrounding our XBRL tagging.
Also, our note disclosures and financial statements are compared across our industry using software that provides search function on XBRL filings. So, for example, when I have something come up in a certain quarter and we've never had to disclose it before, I go out and search through XBRL filings to find similar companies within our industry that have had to present certain similar things in the past. And that really helps me in crafting our disclosures to make sure that we're complying with the spirit of GAAP and providing the information that we're supposed to be providing.
FEI Daily: We heard from the SEC that they are using XBRL extensively to detect fraud and to perform advanced analyses. Do you believe this is widely known by the CFOs?
Malazita: I think they're aware of it, but like I said before, until they receive a comment letter, I don't think it's going to be the top of mind. I think most people just assume that no news is good news and, because they haven't heard from anybody, that their filings are in tip-top shape.
But, as we know from some of the whitepapers that the SEC and other organizations have put out, although the quality and consistency is getting better, it's still not where it needs to be.
FEI Daily: Do you believe financial executives benefit from correctly tagging information because the data is used by investors?
Malazita: Of course. With the right tools, financial professionals can more easily benchmark themselves against their competitors in part or in total. They can more easily see trends in changes in their balance sheet against their peer set, that analysts might start to notice before them and it could provide them some insights to get ahead of some of the questions that they may receive just by understanding the data.
FEI Daily: What would you say to other financial executives that have not started to see the cost benefits from XBRL data available today?
Malazita: They're already required to comply with these rules and there already is a cost of compliance. There's a wealth of data out there in more easily consumable media than just a traditional EDGAR search and finance teams can benefit from utilizing tools that are rooted in XBRL and similar type analyses.
The one thing that I would say is that there are a lot of low-cost XBRL tagging providers out there that do only what you pay them to do. They take your company-specific taxonomy and they tag your current quarter financial statements. They're not necessarily putting a lot of thought into it. They're not paying attention to changes in the taxonomy. I'm sure they will certainly go through and scrub and make your filing consistent for an additional fee. But the partner that we work with is truly a consultant and is truly looking out for our best interest and making sure that we're aware of these changes and that our filings are consistent.
For not much additional cost, a lot of these issues could go away, but until they start to be enforced or until software becomes readily available to consume XBRL data and it's at the top of mind for everybody, I think we still have some problems before it'll really get off the ground.
It is very important to start to get these filings right. Eventually the EDGAR system will be replaced. It'll be outgrown and new technology will come about. And things that are machine-readable and make it easier to perform analyses are going to win out.
As companies start to get more comfortable with utilizing XBRL data to do their financial analyses, they'll be much better prepared in the future when the industry inevitably goes to focusing more on these XBRL filings rather than traditional EDGAR.
To view article from Olivia Berkman @ FEI click here.