The SEC XBRL mandate provides for a period of limited liability of either two years following a filer’s initial XBRL filing date or October 31, 2014, whichever comes first. During this time, XBRL exhibits are deemed as “furnished” instead of “filed.” Under this modified-liability safe harbor provision, the company is protected as long as its compliance efforts are in good faith and any known errors are corrected promptly after discovery. However, when the limited liability window closes, XBRL exhibits will have the same liability provisions as regular filings under the antifraud provisions of the Securities Law. In the event of a misstatement or omission of a material fact in the XBRL files, the company along with its officers and directors can be held legally liable and be subjected to civil and criminal liability.

What should you consider before your limited liability expires? At a minimum, if your XBRL exhibits fall outside of the financial reporting process, you should have disclosure control and procedures (DC&P) in place on your XBRL creation process (see “Do Auditors Care About XBRL?”). However, as XBRL technology becomes integrated into the close process, the preparation of financial statements may become interdependent with the interactive data tagging process. When this happens, the company and its auditors should evaluate the XBRL controls under SOX 404.

Are there broader risks your CFO and audit committee need to consider? Absolutely! The Committee of Sponsoring Organizations of the Treadway Commission (COSO) expands on internal control, and provides a comprehensive framework on the broader subject of enterprise risk management.  In order to design an effective framework to meet the strategic, operations, reporting and compliance needs of XBRL, consider applying the following essential components.

Control environment: When appropriate, involve your CFO and audit committee with every aspect of your XBRL strategy, including process and controls, risk and opportunities. Be proactive and ask your audit committee for an AICPA agreed-upon procedures (AUP) to review XBRL files for accuracy and data quality. (See my earlier post on the importance of an AUP.)

Objective setting: Since XBRL technology is here to stay, how can you best leverage the power of XBRL to drive effectiveness and efficiency beyond external transparency? The logical next step is to explore opportunities that go beyond SEC compliance, such as the existing XBRL Global Ledger Taxonomy and the evolving Risk and Controls Taxonomy, to enhance internal transparency, operational performance and risk management objectives.

Risk assessment and response: What filing is subjected to XBRL tagging? The answer is: it depends. While the requirements for Form 10-K, 10-Q and 8-K are clear, the XBRL rules for registration statements can be tricky, especially with respect to the S-1 resale registration statement and the shelf registration statement on Form S-3. A best practice is to develop a documentation guide based on authoritative standards, such as SEC rules, the Edgar Filer Manual, SEC FAQs, SEC CD&Is, XBRL US GAAP Taxonomy Preparers Guide and resolutions from the XBRL US Best Practices/Data Quality Working Group, to ensure compliance.

In the absence of formal SEC guidance, it is important to establish a policy to assess material XBRL errors and a process to determine whether an amendment filing is required (for details, see this post.)

Control activities: To address data quality and compliance issues, stay current with the latest AICPA exposure draft on XBRL quality attributes of completeness, accuracy, proper mapping and structure. For each of these attributes, assess what could go wrong and implement a safety net and control environment to mitigate risk of errors.

Monitoring: Always keep abreast of latest developments and best practices from the SEC and XBRL US to avoid last-minute surprises. As XBRL standards evolve, monitoring is crucial to a quality filing. Likewise, when the SEC approves a new taxonomy, consider the advantages of early adoption and put a migration plan in place. Involve your internal audit function or a professional service firm to implement a continuous quality assurance program and perform corrective actions.

Information and communication: Benchmark your tag selection and extensions to your peer or industry group, thus enhancing comparability and transparency of your XBRL data. Collaborate with your industry group to collectively drive and shape the taxonomy. Communication is vital as you continue to redesign the close process and simplify SEC disclosures to streamline XBRL efficiency. (For tips, see “Less Is More: the Art of XBRL.”) Always get buy-in from internal and external stakeholders—you want to properly set expectations to avoid unwelcome surprises.

There is no one-size-fits-all approach to designing a quality XBRL filing. Regardless of limited liability protection, each company should manage XBRL risks within its risk appetite, define a comprehensive process to identify all the “what could go wrong” events, and provide an XBRL quality assurance framework.

Ever thought moving to International Financial Reporting Standards (IFRS) would make financial reporting easier for small private companies? Think again. In 2009, after several years of due diligence, the International Accounting Standards Board issued a less-robust set of accounting guidance—kind of a “diet” IFRS—for small and medium-size entities (SMEs). Just recently, the IASB requested feedback on draft implementation guidance on IFRS for SMEs. Progress.

As for the United States, it’s a slow grind. We have long been considering whether there should be a separate set of accounting guidance for private companies, sometimes referred to as “baby GAAP.” The FASB established a Small Business Advisory group in 2004 and a Private Company Financial Reporting Committee in 2007, both of which were supposed to help develop new standards, giving consideration to private companies. Neither has been very successful. In 2009, the Blue Ribbon Panel was formed, composed of members of the FASB, American Institute of Certified Public Accountants, and National Association of State Boards of Accountancy to address private company reporting needs. The panel issued a formal report last January, and based on those recommendations, the FASB has been taking steps to further address the need. Earlier this month, the Financial Accounting Foundation published a plan for addressing private company financial reporting, but the proposal doesn’t include establishing a separate board for private companies, as suggested by the Blue Ribbon Panel. And so we wait. Ho-hum.

But now (at last) the much-anticipated SEC decision regarding incorporating IFRS into the U.S. reporting structure is expected by the end of the year, which may have private companies heaving a sigh of relief. What’s different about the less-robust IFRS guidance? For one, they’ve eliminated topics that aren’t relevant for smaller entities, including EPS guidance, quarterly financial reporting and operating segment disclosures. In addition, where full IFRS guidance allows accounting policy choices, IFRS for SMEs allows only the easier option. Probably the most notable difference is simpler standards for recognizing and measuring assets, liabilities, income and expense items, such as amortizing goodwill and expensing all borrowing and R&D costs. Along with simpler standards come fewer disclosures too! And to further reduce the burden to smaller companies, the revisions to these IFRSs are limited to once every three years—an accounting guidance sabbatical, if you will. Nice.

IFRS transition guidance for SMEs is still a work in process, and that guidance may limit some of the options, but nonetheless would still mean less accounting and reporting rigor by private companies. So for U.S. private companies, relief may come from the incorporation of IFRS, before “baby GAAP” ever comes to fruition … and unexpected benefit of IFRS.

When I was presenting at the Silicon Valley Accountants’ Mastering Financial Reporting’s Last Mile conference, this question was raised: “What constitutes a material error in XBRL if the HTML document can be relied upon?” According to the SEC, even if the HTML financial statements are error-free but the corresponding XBRL exhibit has a material error, you must file an amendment to correct the error promptly. In addition, you may voluntarily disclose that the XBRL exhibit should not be relied on either under Item 7.01 or Item 8.01 of Form 8-K.

So the issue here is what constitutes a material XBRL error requiring an amendment? In the absence of specific guidance, we can infer materiality using a quantitative and qualitative analysis from existing accounting literature. Over the decades, the accounting profession has developed quantitative thresholds as rules of thumb for misstatements or omissions. For example, an error that falls under a 5 percent threshold is deemed immaterial. Similarly, for disclosure, other accounting authorities cite guidelines ranging from 1 percent to 10 percent as being not material. Aside from these quantitative yardsticks, the accounting literature views materiality in the light of “surrounding circumstances” if it is probable that a reasonable person will rely on the information to make judgments. This is analogous to how we think of material information in securities law, if there is a substantial likelihood that a reasonable investor would consider it important to an investment decision or if it would alter the “total mix” of available information about a company.

So what defines a material error in the world of XBRL? Let’s model this concept in a multidimensional hypercube similar to an Excel pivot table. To determine materiality in XBRL language, an error should be segmented by dimensions in a metadata model with axis, domain and members. Simply put, material errors should be evaluated based on (1) size; (2) error type (completeness, mapping, accuracy and structure); (3) users of the XBRL information (investors, analysts, and regulators); and (4) relevant facts that impact judgment.

Not all material XBRL errors are created equal: the relative magnitude of a material error may vary, depending on the users, the type of error and how the information was relied on under the relevant facts and circumstances. For example, incomplete tagging, such as missing financial data schedules, may be material in the eyes of investors, analysts and regulators. As a result, this type of error would generally warrant an amended filing. On the other hand, missing calculation links or other structural errors are technical XBRL errors, a clear violation of the SEC Edgar Filer Manual. But is it a material error that requires an amendment? To make that determination, we have to put ourselves in the shoes of the reasonable investor. Would the investor be misled by this technical structural error or was this information useful and nice to have from a data consumption standpoint? Likewise, size alone should not determine materiality. Large errors may be small problems and small errors may be big problems.

While the accounting profession has provided very helpful guidance on materiality, ultimately, when it comes to material XBRL errors, it may lie in the eyes of the beholders: the investors, analysts, regulators and jurors in a court of law—there is no “bright line test” when it comes to materiality in accounting rules or our legal system. If somehow, somewhere there is a probability that someone will be affected by relying on your XBRL exhibit in their decision, then materiality is subject to a 4-D hypercube model analysis of size, error type, data consumers and surrounding circumstances.

Last year was our first year to be named to the San Francisco Business Times’ list of the 100 largest women-owned businesses in the Bay Area. And we’re proud to be listed again, coming in at No. 44. In the East Bay, we’re No. 23. Both lists are based on 2010 revenue. If you’re a subscriber, you can see what it’s all about in the Sept. 23 edition on the Business Times website.

“It’s inspiring to be in such great company as RoseRyan continues to grow and expand our business lines,” says founder Kathy Ryan. “Our business model, which is to offer our top-shelf consultants a dynamic range of engagements, intellectual challenges and the right work/life balance, sprang from my own needs as a working woman. It’s gratifying to see RoseRyan recognized in this way.”

There is no fixed form for a financial model, as it is always tailored for the type of business, and various models serve different purposes. However, a good design that is easy to follow and allows smooth data flow has a big impact on the model’s scalability and efficiency of use.

An integrated model that contains BS, PL and CFS is usually desirable for forecasting, as it reflects a more complete picture of the business. I’d like to share a few ideas in structuring this type of model. There is no right or wrong—the best structure is defined by the business and how good users feel about it.

Keep it neat and simple. Try to minimize the number of tabs, as long as the source data and inputs are categorized organically to support the final output. Navigating through too many tabs will make it hard to find your way back. Keeping similar information in the same tab can enhance efficiency and accuracy. I’ve seen models break output financials into BS, PL and CFS by month, quarter and year, which ends up creating nine tabs for similar information. Instead, data can be sorted into two tabs: a master sheet with BS, PL and CFS by month, which serves as a data pool; and a reporting tab customized to the layout you wish to see, such as financials by quarter, by year or both, with ratios and so on. You may also find that consolidating BS, PL and CFS into one tab will enhance visibility of data links.

Place assumptions in applicable worksheets. You may often see modelers put all assumptions in one tab in an effort to keep things looking neat and tidy. However, when the model grows larger and more complex, the artificially created inter-sheet links will require extra time to navigate and extra effort to scale or revise. For example, in most cases, you will have an operating expenses tab that contains numerous line items that don’t share the same assumption, input and projection method. Creating assumption columns next to these items will give you a straight look of how the projections are made. Be sure to shade the cells so you don’t miss the input areas.

Set up a warning system to trap errors. Ensure all data tie out and reconcile. It is critical to set up cross-check, total tie-out rules to ensure accuracy when flowing through tabs. Conditionally format  any unreconciled data or imbalance in red so you won’t miss it. Since BS often sees imbalance, placing these rules is essential to identify errors at each step and correct them so you don’t walk into a disaster.

Ultimately, the goal is to achieve simplicity in structure so people can follow it easily—to make it look like a book and read like a book. By doing so, you will help users—the CEO, CFO, COO and other top executives—see a much clearer future picture of the business and be able to make better decisions.