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How Valid Are They? -- An Examination of XBRL Filing Documents with the SEC EDGAR system

How Valid Are They? -- An Examination of XBRL Filing Documents with the SEC EDGAR system. Kuo-hua Chou National Pingtung Institute of Commerce, Taiwan Email: ckhmike@gmail.com. XBRL-based Filings. An important step in XBRL progress. At first stage, there are two simpler ways:

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How Valid Are They? -- An Examination of XBRL Filing Documents with the SEC EDGAR system

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  1. How Valid Are They?-- An Examination of XBRL Filing Documents with the SEC EDGAR system Kuo-hua Chou National Pingtung Institute of Commerce, Taiwan Email: ckhmike@gmail.com

  2. XBRL-based Filings • An important step in XBRL progress. • At first stage, there are two simpler ways: • A voluntary program: e.g., the US SEC’s Voluntary Filing Program (VFP). • A fill-in-the-blank approach: e.g., the mandatory test filings in template format by Chinese listed companies. How Valid Are They? Kuo-hua Chou

  3. VFP of US SEC • The program started running from April, 2005. • Till Nov. 30, 2006, there are a total of 97 VFP filings representing 32 companies. • United Technologies has the most number of filings: eight. How Valid Are They? Kuo-hua Chou

  4. Well-formed and Valid • According to XML 1.0, an instance document must be well-formed, and should be valid. • For an XBRL instance to be valid, it must be created in accordance with a DTS. How Valid Are They? Kuo-hua Chou

  5. On-line Validation • The checking schemes in the EDGAR system only cover document type, file extension, and presence of a particular XBRL tag. • The EDGAR system does not support the on-line validation of XBRL instances against their respective DTS. How Valid Are They? Kuo-hua Chou

  6. Valid and Inconsistent • XBRL 2.1 only invalidates an instance with syntax errors. • XBRL 2.1 does not invalidate an instance with only semantic inconsistencies, such as calculation errors. • In this paper, an instance will be tagged “inconsistent” when there are calculation errors found in it. How Valid Are They? Kuo-hua Chou

  7. Validation Tool • I used Fujitsu’s Taxonomy Builder & Instance Creator to validate all VFP filings. • Reason: the software is free, reliable and multifunctional. How Valid Are They? Kuo-hua Chou

  8. Validation Results • Among the 97 VFP filings, 41 instances are valid, the other 56 instances have calculation errors. • Hence, these 56 instances are inconsistent with their respective DTS. How Valid Are They? Kuo-hua Chou

  9. Inconsistent Rate • Total number of filings: 97. • Total number of inconsistent instances: 56. • Total inconsistent rate: 56/97=57.73%. How Valid Are They? Kuo-hua Chou

  10. Examples • The following companies have at least four inconsistent filings: • RR Donnelley: 4/4. • EDGAR Online: 6/6. • EMC: 5/6. • Satyam Computer: 4/4. • Xerox: 4/4. • Dow Chemical: 4/4. How Valid Are They? Kuo-hua Chou

  11. Numbers of Errors • Number of filings with number of errors: GTE 60: three. LT 60 and GTE 50: three. LT 50 and GTE 40: six. LT 40 and GTE 30: seven. • The highest number of errors in one single instance is 68, in the second filing of RR Donnelley. How Valid Are They? Kuo-hua Chou

  12. Reasons for Inconsistencies • The technical side: Misconceptions about summation-item relationships. • The accounting side: Misconceptions about the inherent relationships between accounting concepts. • The practical side: Intentional omissions on some phantom sub-total elements. How Valid Are They? Kuo-hua Chou

  13. Case: EDGAR Online • All its six instances are inconsistent. • The numbers of calculation errors are increasing as well: 12, 15, 22, 32, 32, 36. • The following five slides explain how to detect and correct them. Context: assets of EDGAR Online as of June 30, 2006, taken out of its fifth filing. How Valid Are They? Kuo-hua Chou

  14. The Fifth Filing of EDGAR Online How Valid Are They? Kuo-hua Chou

  15. The Keyed-in Values and Calc Values How Valid Are They? Kuo-hua Chou

  16. Partial View of Assets’ Calculation Tree How Valid Are They? Kuo-hua Chou

  17. A Partially Corrected Calculation Structure • The blue stamps represent three missing sub-total elements. After filling in values of these three elements, the CALC value of Total current assets is the same as its keyed-in value. How Valid Are They? Kuo-hua Chou

  18. A Fully Corrected Calculation Structure • EDGAR Online had missed its Other Intangible Assets in the XBRL instance. After filling in the value and adjusting the values of two corresponding sub-total elements, the CALC value of Assets is the same as its keyed-in value. How Valid Are They? Kuo-hua Chou

  19. Model Companies • Microsoft: All seven filings are valid. • Adobe Systems: All six filings are valid. • United Technologies: Although its first three filings are inconsistent, its last five filings are valid. • Altria Group, Pepsico,3M and GE each has two or three consecutive valid filings. How Valid Are They? Kuo-hua Chou

  20. Extension Taxonomies • Every VFP company builds its extension taxonomy. Why? • Companies couldn’t find corresponding elements for some of their accounts or terms in use. The fit issue. • Companies wanted to retain their own labels instead of using the standard labels defined in base taxonomy. The label issue. • A simpler calculation or presentation structure. How Valid Are They? Kuo-hua Chou

  21. The Fit Issue • Given the diversity of GAAP, the fit between taxonomies and financial statements cannot be perfect. • One way to measure the fit: • CEU: total number of company-defined elements used in an instance. • EU: total number of elements used in an instance. • CEU/EU: the higher the rate, the lower the fit. How Valid Are They? Kuo-hua Chou

  22. How Poor is the Fit? • EDGAR Online: the average rate of CEU/EU for its six filings is 29.38%. • Microsoft: the average rate of CEU/EU for its seven filings is 54.51%. • Altria Group: the average rate of CEU/EU for its two filings is 71.13%. How Valid Are They? Kuo-hua Chou

  23. Why is the Low Fit? • It needs further work to analyze what constitute the low fit. Does it come from low fit in the main financial statements (if so, which one has the lowest fit), or from low fit in the footnotes, MD&A, MR, etc.? How Valid Are They? Kuo-hua Chou

  24. Case: Microsoft • Some elements are used in two or more scenarios. • It seems that the low fit in Microsoft may come from footnote, mda, etc. How Valid Are They? Kuo-hua Chou

  25. The SEC’s Reaction • The SEC has awarded $5.5 million to XBRL US Inc. to complete the writing of XBRL taxonomies. • Hopefully, this can drastically raise the fit. How Valid Are They? Kuo-hua Chou

  26. The Label Issue • There aren’t standard chart of accounts prescribed by regulatory agencies. • In practice, companies may use different labels to represent the same concept. • In the label linkbase of base taxonomy, there is a standard label defined for every concept. • Companies may prefer using their own labels to standard labels. How Valid Are They? Kuo-hua Chou

  27. The Label Issue • Through the use of priority and use attributes of labelArc, company-defined labels can get higher priority and replace the standard labels. • Seven companies have used the above scheme in their label linkbases: Microsoft, PepsiCo, GE, Ford Motor Credit, Ford Motor Co., and ENGlobal. How Valid Are They? Kuo-hua Chou

  28. The Impact of XBRL • Among the 32 companies, there are only 7 companies using the priority scheme in the label linkbases. Q: Has the implementation of XBRL narrowed the range of choices in account labels? A: It needs more work to analyze the impact. How Valid Are They? Kuo-hua Chou

  29. Succinctness • For succinctness sake, some companies build extension taxonomies by importing the upstream usfr-pte or usfr-fste taxonomies, and define their own calculation or presentation structures. • In this way, companies can avoid a lot of phantom sub-total elements. How Valid Are They? Kuo-hua Chou

  30. Against the Rule? • According to the SEC’s VFP rule, filers must use one of the standard US GAAP Version 2.1 based taxonomies developed by the XBRL consortium as part of the basis for creating their instance document. • The way of succinctness seems to violate the rule. How Valid Are They? Kuo-hua Chou

  31. Case: Ford Motor Co. • Ford Motor Co. builds its extension taxonomy by importing usfr-pte taxonomy. • The calculation structure by Ford Motor Co. is much simpler than the structure defined in the usfr-ptr and us-gaap-ci taxonomies. e.g., the calc structure of balance sheet How Valid Are They? Kuo-hua Chou

  32. Ford Motor’s Calculation Structure of Balance Sheet How Valid Are They? Kuo-hua Chou

  33. Taxonomy Versioning • For the time being, few companies maintain a relatively stable taxonomy. • Most VFP companies file a different taxonomy every time they do the filing. • If the contents are the same, the file names should be the same. On the other end, if the contents have changed, the file names should be changed. How Valid Are They? Kuo-hua Chou

  34. Versioning Problem • Some VFP companies, e.g., Microsoft, EMC, EDGAR Online, and Adobe Systems, have used the same file names for schema and linkbase files of two consecutive filings even though the contents have changed. • This will cause problems in validation process. How Valid Are They? Kuo-hua Chou

  35. Case: Microsoft • Among its seven filings, the file names of the main schema files in its last six extension taxonomies are exactly the same: “msft-20050228.xsd”, and linkbase files have the same phenomenon, too. • Except for the seventh filing, the contents of the schema and linkbase files had changed every time they were filed with the EDGAR system. How Valid Are They? Kuo-hua Chou

  36. My View • In most software, the validation process is triggered by pushing the “Validate” button. If errors occur after validation process, users tend to feel that the instance is invalid. • Before an agreement is reached and rules are promulgated in certain specification (e.g., FRIS), it’s better to correct all the calculation errors before filing the instances. How Valid Are They? Kuo-hua Chou

  37. Suggestions • A full-fledged on-line validation function should be developed and installed in the EDGAR system in the near future. • Before that happens, the validation task may be performed by staff members of the EDGAR system. How Valid Are They? Kuo-hua Chou

  38. Suggestions • The SEC may consider adding a column showing the status of validity on the web page that lists all the XBRL filings chronologically. How Valid Are They? Kuo-hua Chou

  39. Suggestions • Since there are already four companies that have used same names for consecutive files that are not exactly the same, there should be some warnings on the individual web page that lists files for a single filing that has the above problem. How Valid Are They? Kuo-hua Chou

  40. Suggestions • SEC may consider requiring companies to provide the “delta” contents, which are differences between two consecutive taxonomies. • This information is very important both for outsiders to perform validation task, and in the future, for auditors to perform XBRL attestation services. How Valid Are They? Kuo-hua Chou

  41. The End

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