Does XBRL Make Financial Statement Presentation Issues Irrelevant?
On December 17, 2008, the U.S. Securities and Exchange Commission (SEC) required firms to use eXtensible Business Reporting Language (XBRL) when issuing financial statements to regulators or posting financial statements to their corporate websites (SEC 2008). This mandate represents a significant paradigm shift in the financial disclosure environment. Financial statement users potentially benefit from a) more timely disclosures, b) reduced data processing costs, and c) improved accuracy of data handling. Moreover, issues related to presentation of financial data potentially are much less important.
A few weeks ago, I was involved in a Professional Development session here at the FASB. The session’s topic was Comprehensive Income, and it included reading materials and cases that the participants were assigned to complete prior to attending the session. The reporting of Other Comprehensive Income was the subject of a recently promulgated standard update (ASU 2011-05). Also, FASAC has encouraged the FASB to place Comprehensive Income on its future agenda with a focus on determining what components belong in “earnings” and what components belong in “other comprehensive income” (or some other monikers).
With all this focus on comprehensive income, I was somewhat taken aback when prior to the PD session, an XBRL staff member, whose opinion I respect, approached me and essentially asked what’s the big deal? In other words, with the electronic tools at our disposal, including XBRL, why should we even care how something is presented on a paper financial statement? Assuming competitive markets and that analysts are sufficiently motivated to figure out what’s really important, the ease by which XBRL (or other tools) allows extraction of financial statement information would render presentation issues irrelevant. This attitude was similarly expressed by Hans Hoogervorst, IASB Chairman, in a recent XBRL conference. Here’s a quote from an Accounting Today article (full article here):
[Hoogervorst] noted that despite the potentials of the technology, certain aspects of financial reporting appear to be stuck in the offline, pre-PC world. He said he had witnessed endless debates about whether Other Comprehensive Income should be shown on the same sheet of printed paper as net income, or on a separate sheet. “Welcome to the 21st century!” he exclaimed. “XBRL has the potential to supplement the one-size-fits-all approach of today’s financial statements with an à la carte menu of financial information. Doing so will allow users to extract the information they need, and no more. Retail investors, employees and casual observers of a company will be able to extract information about the key metrics of a company. While more sophisticated users are free to slice and dice financial information and wade through as much or as little information as they need – all at the click of a mouse.”
Anecdotal evidence from letters commenting on the exposure draft that led to ASU 2011-05 suggests that many FASB constituents believe presentation is still important. These constituents expressed a strong opinion that placing OCI items in the income statement, or presenting a per-share number for comprehensive income, would seriously muddy up the waters and confuse investors. In addition, we have academic research with evidence that presentation matters. Studies by Hirst and Hopkins (1998, JAR), Maines and McDaniel (2000, TAR), and Chambers et al. (2007, RAST) immediately come to mind. However, a caveat is that these studies were executed in the “post-PC world” (using words similar to Hoogervorst) but prior to when XBRL was adopted.
The extant XBRL world provides many research opportunities for accounting academics. A few early studies provide some preliminary evidence. Using an experimental design, Hodge, Kennedy, and Maines (2004, TAR) find that the ability to obtain and integrate footnote disclosures by non-professional investors improves when they use XBRL technology relative to when they do not use this technology. However, they also find that approximately half of their participants who had access to the technology did not use it, which reinforces the notion that investors must be willing to incur non-trivial start-up costs of employing new technology. The result also suggests that education about the benefits of XBRL must be widely disseminated to induce financial statement users to access the technology. As investors become more accustomed to XBRL technology, the realized benefits could very well increase.
Blankespoor, Miller, and White (2011, working paper) is an early study that employs mandatory XBRL data during the first phase-in period to investigate the effects of XBRL on information asymmetry and market efficiency. The authors examine changes in trading behavior and price discovery around 10-K filings for XBRL adopting firms. Their results are not favorable with respect to the effects of XBRL on the market. Specifically, they find that trading volume and market liquidity decline, and price discovery is slower in the initial year of XBRL adoption. Using a different design where the XBRL adopting firms are matched with non-adopting firms, the authors make the same inferences from their evidence, and there is some weak evidence suggesting the effects are greater for small investors.
While the Blankespoor et al. (2011) study is the most rigorous study on the effects of XBRL to date, there are significant caveats that must be considered when interpreting its evidence. First, and perhaps most significant, the evidence relates to the initial transition period for XBRL. In this respect, the evidence is consistent with the experimental study by Hodge et al. (2004) that investors are reluctant to incur the costs necessary to implement the technology. Over time, as investors become more familiar with XBRL and its use is more wide-spread, these results could very well change. Second, the study necessarily is restricted to very large firms that were required to adopt XBRL in its first phase. Perhaps the information benefits from XBRL are more pronounced for small firms. Finally, it’s difficult to understand why XBRL would result in a deterioration of a firm’s information environment, since the XBRL filings are in addition to (they do not replace) what the firm had provided previously.
Given these caveats, I expect research related to XBRL will proliferate as it becomes more widely used. In addition, FASRI will do what it can to educate the public about XBRL. FASRI has planned a Roundtable scheduled for May 15th that will discuss XBRL and the mechanics of using it in your research. Look for an upcoming announcement and plan to attend.