From the December/January 2012 issue of Treasury & Risk magazine

Tagging In-House

Outsourcing XBRL coding falls out of favor as the liability grace period ends and tight deadlines limit companies’ flexibility.

Most companies, whether large or small, currently outsource the tagging of their financial filings into the interactive XBRL format. But in-house solutions are becoming more attractive, in part because the two-year liability grace period is winding down. During the limited liability period that covers the first two years in which companies tag their financial filings, the Securities and Exchange Commission alerts companies to errors that need fixing. Once that period ends, errors will mean restating the company’s financials.

“That’s big, because restatements can end up on the front page of the Wall Street Journal,” says William Sinnett, research director at Financial Executives International (FEI).

A recent FEI survey found companies are increasingly bringing the XBRL effort in-house, with nearly 100% of those that plan to change their XBRL process saying they intend to bring it in-house. Ernst & Young’s research shows that over the last year, the portion of companies using an outsourcer dropped to 85% from 90%, and Paul Penler, an executive director at Ernst & Young, says he expects that to fall to 75% in 2012.

Penler says dozens of companies have had to file amendments to correct errors, such as attaching the wrong XBRL tag to an exhibit or forgetting to tag submissions accompanying financial statements.

He notes the complexity of the work involved, with more than 200 XBRL-related rules, and all the exhibits and footnotes in financial statements that also need tags attached. And as companies are required to do more detailed tagging, the likelihood of errors increases, he says. The first group of filers is already dealing with those requirements, and all others will start after June 15. Penler points out that even if companies outsource the tagging, they remain responsible for accuracy.

Timeliness is another factor encouraging companies to do their own tagging. Companies now may make changes to financial reports until shortly before filing. Those handing XBRL coding to outsourcers—typically big financial printers such as R.R. Donnelley and Merrill—have to queue up, resulting in shorter deadlines and less flexibility. Plus, any changes that have to be made at the outsourcer could cost a small fortune.

“Having the ability to push this past what is feasible using an outsourcer can have real value,” says Robert Kugel, research director at Ventana Research.

And it may ultimately be less expensive, at least once the complicated process has been set up. “It’s not uncommon for a year’s worth of detailed tags to cost $50,000 using a third party,” says Penler, adding that, depending on the complexity of  the company’s filings, XBRL coding software can be purchased for $5,000 or less.

 

For a discussion of financial executives’ concerns about the capacity of the outsourcing vendors, read Will More Filers Create XBRL Crunch?

And for a look at the work involved in detailed tagging, see XBRL Tags Pile Up.

 

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