Lora Bentley spoke with Colin Diamond, a securities partner for the international law firm of White & Case. Diamond recently authored a client alert on the Securities and Exchange Commission's proposed XBRL filing requirement.
Bentley: It looks like the XBRL filing rule will make preparing to file twice as much work as it was before. Is that true?
Diamond: It's definitely going to create additional work in the first year and some additional work in the second year. I wouldn't say that it's going to be a double workload or twice as much work, but it's going to involve in the first year a material, incremental amount of work. The SEC's estimates were that for the first year, it would be an additional 125 hours of work just to tag the face of the financial statements, and then, the next year when companies have to tag the footnotes to the financials, it would be an additional 100 hours.
Bentley: And in later years?
Diamond: There's a pretty significant drop. The SEC estimated that it would only be 17 hours of work for the face of the financials in subsequent filings, and 50 hours for the footnotes.
The one thing that I'll say is that if you look at the SEC survey against other surveys that have been done-in particular, one by Merrill Corporation, the financial printer - the estimated amounts of time seem to vary significantly between those companies that are doing the tagging in house and those that are outsourcing it. Not surprisingly, the amount of time is significantly higher for those that are choosing to do the tagging in house. So I think the numbers there are subject to fairly wide variations depending on how the company goes about doing it.
Bentley: Just to be clear on the process, will companies prepare their financial statements first and then do the XBRL tagging?
Diamond: For this first year, that is the expectation for almost all companies. There will be essentially two separate processes. There's the process of completing the financial statements in the manner that the company has always done, and then there's the second process, where they go through the exercise of tagging each of the data points in those financial statements.
Bentley: Will accomplishing the tagging be a matter of buying new software, or bringing in extra staff, outsourcing, or some combination?
Diamond: First of all, it's too nascent to know for sure how this is going to work out for everyone, but in the survey by Merrill of the limited number of companies that have done this, the split between doing it in house or outsourcing it was approximately 50-50. And there's a certain percentage in the middle that did a combination of both approaches.
Bentley: When companies are deciding whether to outsource or to do the tagging in house, what are some of the things they should consider, generally?
Diamond: I think they would have to consider cost first because there will be a differential on the two. It's hard to comment on that because they're going to have to measure the in house cost. It may not be an out of pocket cost, but there's going to be a cost in terms of time and resources.
That's really the second point: Do they have the resources internally to devote to learning how to tag and to going through that exercise. It's not overwhelming, but it's clearly hundreds of hours, most likely, for the first time they're going to do this.
Another factor is going to be whether they value acquiring the experience in house and whether they have the technological resources to do it. Even if they have the manpower in their financial controller group or their internal reporting groups, the question is whether or not they have the technological resources within the company to do it.
I think for that reason, when you look at the roughly 50-50 split, bear in mind that it's based on some of the larger companies in the U.S. As it gets pushed down over the course of the next three years to all reporting companies, it seems unlikely that all of them are going to decide to do this in house. In many cases, they have a financial reporting department that consists of three or four people, and that may not be enough to do this in house. I would expect to see a shift toward outsourcing once it gets to the smaller companies.