global standards for global investors

Posted Friday, July 12

Ahmed Algamal, CPA, CA, IFRS XBRL Consultant, and Bethany Moll, XBRL Operations Planning & Strategy, Donnelley Financial Solutions (DFIN)

U.S. portfolios held approximately $12.4 trillion in foreign securities at year-end 2017, up 25% versus the prior year.  And the value of foreign holdings of U.S. securities was measured at $19.4 trillion as of June 29, 2018, a gain of 5.4% from 2017. The growing level of cross-border investment calls for global data standards. In this increasingly international economy, cross border investors demand the ability to easily, seamlessly, analyze companies across industries and market cap, regardless of geography. Internationally adopted data standards make that possible.

U.S. based companies, and foreign private issuers (FPIs) filing in US GAAP, have been preparing their financials in XBRL format since as early as 2009. Companies filing in IFRS were “on hold” until the U.S. Securities and Exchange Commission (SEC) approved the IFRS Taxonomy. That day came in March 2017, when the SEC published the IFRS Taxonomy, triggering the requirement for foreign private issuers (FPI) who file in IFRS to submit financial statements in XBRL format. Now that every FPI listed on a U.S. exchange is required to report in XBRL, just like their U.S. counterparts, investors are better able to compare companies that may just be located in different geographies. 

IFRS filers comply with XBRL standards

Just like US GAAP issuers back in 2009, IFRS filers have faced hurdles in complying. Fully understanding the SEC rule, deciding whether they should outsource XBRL preparation or bring the process in-house, selecting the right vendor, and learning how to work with the taxonomy, are all challenges common among issuers. 

IFRS filers today are working their way up the learning curve, tackling issues that are typical for new XBRL preparers: understanding that XBRL creation is about the data, not about matching the paper rendering of their financial statement; learning that most values should be reported as positive, not negative. These issuers are learning how to select the right element by reviewing the properties of an XBRL concept and checking authoritative references. These are lessons that US GAAP filers had to grapple with years back. Vendors with 10+ years of experience are helping their IFRS filer clients work through technical and conceptual difficulties more easily. They’ve been through this all before.

Another challenge for IFRS filers is that the IFRS Taxonomy today is not as mature as the US GAAP Taxonomy. When the US GAAP Taxonomy was initially introduced, there were a lot of inconsistencies and missing elements that were worked out over time. The more a taxonomy is used, the more feedback is received, and the better the taxonomy becomes. The IFRS Taxonomy is still in its infancy; with every SEC submission and every public review, IFRS standards will get better and better. In fact, new elements have already been introduced to the IFRS Taxonomy since it was first published by the SEC.

IFRS filers differ from US GAAP filers in that they often are only required to file XBRL once a year (as a 20-F or 40-F), although some submit Form 6-Ks with XBRL, often on a more frequent basis. The relatively lower frequency of filing versus US GAAP filers, means these issuers have less exposure to XBRL each year, and often must rely more heavily on vendors for support. But we have found that just like US GAAP filers, IFRS filers had a significantly smoother time of it in the second year of XBRL preparation. 

In addition, FPIs on IFRS will be faced with the challenge of incorporating Inline XBRL into their process in 2021, shortly after they’ve revised their process to work with conventional XBRL and learned how to work with the IFRS Taxonomy.

On the plus side, the XBRL marketplace is significantly more mature and sophisticated today than it was ten years ago. Software applications, vendor experience, and data usage is lightyears from where it was when the SEC program first began. That puts IFRS filers at a clear advantage to their US GAAP counterparts in terms of the resources and expertise they can leverage.

ESMA standardizes data for cross-border investors

With increasing global investment, regulators are opting for greater standardization in financial disclosures. Starting January 1, 2020, the European Securities Market Authority (ESMA) will begin requiring issuers in EU regulated markets to follow the European Singular Electronic Format (ESEF), Inline XBRL standards. The ESEF Taxonomy, which is currently under development, is based on the IFRS Taxonomy with some modifications. For example, the taxonomy is in multiple languages to accommodate the 23 EU languages. EU issuers will need to submit their XBRL filing to their home country, and there will likely be separate data repositories for each country.

Compliance with Inline XBRL requirements will be phased in: primary consolidated statements must be tagged for submissions with periods beginning January 1, 2020, which will affect filings for 2021; block tagging of footnotes will be phased in next, affecting filings for January 1, 2022. Issuers are allowed to voluntarily conduct detailed tagging of footnotes starting in 2020. 

Convergence

Regulators are becomingly increasingly savvy to the benefits of standardization in a global marketplace. They recognize that to compete effectively for funds in international capital markets requires transparency and accessibility in data reported by their home country issuers. Data standards make that happen. 

Issuers always face challenges when they first begin standardizing their submissions; but with the increasing use of the XBRL standard, and more and more expertise available to them in the marketplace, they quickly move up the learning curve.

 

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