We will be posting weekly to our blog with examples we’ve encountered to demonstrate why investors are not using XBRL. Here is this week’s example:
Applied Micro Circuits Corp. 10-Q
Investment analysts frequently use a non-GAAP measure called EBITDA to analyze the cash flow a company generates before capital expenditures. The acronym stands for earnings before interest, taxes, depreciation and amortization. Depreciation and amortization are added back to income since they are non-cash items. Since share-based compensation expense is also a non-cash item it is frequently added back by investors as well.
Applied Micro Circuits started filing XBRL financials in August 2011. Approximately one year later, on July 31, 2012, they filed a 10-Q with the SEC that contained an XBRL extension called Warrants Compensation Expense on their cash flow statement. Here is what the cash flow statement from that filing looks like:
The Warrants Compensation Expense on the cash flow statement is listed as $1,289,000,000 when it should only be $1,289,000, a difference of $1,287,711,000.
| As-Reported XBRL | TagniFi (Corrected) | Difference | |
| Operating Income | $(24,952,000) | $(24,952,000) | $- |
| Depreciation & Amortization | 3,768,000 | 3,768,000 | – |
| Share-Based Compensation | 1,296,689,000 | 8,978,000 | 1,287,711,000 |
| EBITDA | $1,275,505,000 | $(12,206,000) | $1,287,711,000 |
If an investor computed EBITDA for this period using the the as-reported XBRL data they would have computed it to be $1.276 billion when in reality it was actually $(12.2) million. Using the XBRL data would have overstated EBITDA by $1.288 billion.
A simple check of either the net cash from operating activities or the net increase (decrease) in cash and cash equivalents would have caught this error before it was distributed to the investing public. There is no reason why the company, the XBRL vendor (RR Donnelley), or the SEC should not have caught this error.
Investors need accurate data to make investment decisions. Examples like this, which are too easy to find, are why investors are not using XBRL. Exempting smaller companies from the XBRL requirement is not going to solve the problem. The data needs to be validated or the rules need to be enforced before investors will start using XBRL.