La SFAF, en partenariat avec JPA international, a organisé, en octobre 2019, une conférence co-présidée par les présidents Jean-Claude Trichet et Jean-Paul Gauzes sur la révolution digitale. Cette conférence avait conclu sur l'urgence de réconcilier prix et valeur par une meilleure comparabilité des ratios financiers. Dans cette perspective, la commission des émetteurs de la SFAF cherche à promouvoir la transposition en Europe du Financial Lab du FRC. Cet article s'inscrit dans ce projet de faire de XBRL/ESEF le véritable esperanto de la finance. Il a été rédigé en anglais afin de contribuer à la création d'une « task force » internationale dont l'urgence est accrue par la volatilité des marchés financiers généré par la pandémie covid-19.
Disclaimer : This paper is co-written Nicolas d'Hautefeuille from CA CIB and JB Bellon former chairman of the SFAF and Simon Finch, from Bloomberg. It reflects only their personal opinion. We are grateful to Jacques Potdevin, chairman of JPA International and Romain Boscher, global head of equity for Fidelity, for their comments and their support.
XBRL and big data : What should be done to speed up the digital revolution in financial reporting?
The past 5 years have been quite active in the area of public information and accounting standards, with a great deal of activity coming from European Commission and ESMA (MIF2, Universal Registration Document, ESEF…) and IASB (IFRS 9 and 17 on one side and IFRS 15, 16 on the other) This move was especially designed to strength investor tools with an improvement in quality, transparency and comparability of information, after a long-lasting growth period which was marked by the disruption of digital revolution. However, entering into the recession, it is a good moment to understand why investors and financial analyst were somehow expecting more from these changes and specifically of what we should expect from iXBRL which the European choice for electronic reporting.
XBRL in the US and iXBRL in Europe convey a great outcome, the creation of a global common language for financial reporting. However electronic reporting is only a tool, users will make the real changes. The ability to use big data to improve investment decision process is linked to accuracy in metrics. This is a major challenge for Europe because it can be done only by making significant investment in AI. This paper discusses the issues to create a “win/win” situation for issuers, analysts, rating agencies, data providers and regulators.
European Issuers are still not convinced of the value of iXBRL to improve financial reporting.
Today, European companies listed in the US are already providing translation in XBRL of their accounts. Their perception is that the digital revolution has been a flop in the US. The SEC has not been able to provide an open solution to score companies by using big data. The impact of ESG is also making financial reporting more complex: capital allocation will be impacted only if companies include extra financial reporting in the fair value of their assets. As activist shareholders are a rising event risk, management have a strong incentive to match data quality.
For analysts, accuracy in the information is paramount, but timeliness is also highly relevant to determine the value of this data.
Information are valuable after release and depreciate thereafter : the market seeks the fastest, most accurate data available. In the US, tagging is set by a regulated taxonomy but is often an independent process which leaves room for discrepancy. The market is also increasingly interested in when information is changed. In terms of productivity, the value of financial analyst is to spend less time on scoring and more time on interpreting results. A lot of detailed analysis is derived from notes. Extracting these data is crucial for making data comparable across companies.
Rating agencies are at the forefront of the progress made to benchmark global industries.
They are ringing the alarm : rising complexity in accounting standards is making complex to clean cash flow from exceptional and noncash items. Post IFRS 16, both free cash flow and financial debt are unaudited metrics; it is becoming highly complex to adjust financial debt and EBITDA between US and European corporates. Boeing can be used as a POC : Moody's and S&P made very tough rating actions (from A+ /A1 to Baa1/BBB neg) because they are becoming aware that Boeing's reporting is less transparent than Airbus' one (netting of developments costs with customer advances).
This digital revolution will improve the accuracy of metrics provided by data providers.
Speeding up XBRL data as a prime source of financial information require that data providers invest massively in AI to increase accuracy in raw data extraction. Only major data providers will use XBRL to adjust metrics because the granularity in data is so big than a financial analyst cannot work on an in-house financial model to use them. Today, the perception is that XBRL is not a progress for financial reporting in the US. Despite the fact that the SEC is providing a regulated taxonomy which is improving the granularity in financial information, neither rating agencies or data providers are using today this tool to improve accuracy in their methodology.
Regulator must standardize information provided by companies to allow easier screening and analysis of scale.
The volatility triggered by the corona virus crisis is increasing the gap between price and value : comparability is key to improve stability. Carillon's default in the UK was also the result of the opacity in its financial reporting. The Bank of England stated that loss of confidence in financial reporting could trigger a financial crisis. The challenge is to reduce the gap between APM (alternative performance measure) and audited metrics. Using XBRL taxonomy would improve greatly reliability in financial statements. However, US GAAP are rules based but IFRS are principles based, so tagging is much more complex to implement for European issuers than US ones. ESMA and the IASB will not provide a regulated taxonomy to European issuers. We welcome the fact that ANC has published some guidelines but they remain non compulsory).
To make scoring “clear and simple”, XBRL could improve financial reporting in 3 different ways :
- Issuers should benefit from advice provided by a Financial Lab to implement “better communication” (i. e. convergence between accounting data and metrics used by investors cf. the work done by the Financial Lab in the UK).
- Data providers should apply back testing to their methodologies to make scoring a science. In terms of KPI, data providers should focus on interest cover and DCF which are the key drivers for credit risk and enterprise value.
- Supervisors as SEC and ESMA should work together (with FRC too) to use taxonomy as a way to square the circle on complex accounting issues.
Nicolas d'Hautefeuille et Jean-Baptiste Bellon, membres de la SFAF, et Simon Finch, Bloomberg
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