XBRL is coming.
It is not expensive.
It will improve governance.
It will increase transparency.
It is endorsed by the Securities and Exchange Commission.
Is there anything familiar about this picture? Does this sound something like the original take on Sarbanes-Oxley?
But this time it looks like a “win-win.” You be the judge.
Extracting comparative financial data from the increasingly robust ’34 Act filings of public companies has become something of a subjective art.
Were the right comparables extracted and presented? What did comparative analysis prove? Where is this data generally available to the investing public, or, as a practical matter, is it isolated with a small group of professional investors who, in turn, were fed comparative data only by sophisticated analysts and consultants?
In March 2005, the SEC promulgated Release S 7-35-04, which adopted a series of technical rules amendments to allow companies to “submit voluntary supplemental tagged financial information using the eXtensiable Business Reporting Language format as exhibits to EDGAR filings.”
Simply put, companies were encouraged to provide supplementary analyses of significant financial reporting items (balance sheet, P&L, cash flows, statement of capital), organized in a particular format shared in common by many other companies (perhaps companies grouped by industry).
These “tagged” financials would provide an apples-to-apples comparative base, so that an investor comparing two car manufacturers might be able to readily obtain comparative data on sales, profit margins, labor costs, cost of parts, and numerous other subcategories which would permit a “drill down” into the financial heart of operations.
Such materials would not be deemed to have been filed for purposes of certain sections of the securities laws (eliminating specific statutory liabilities), although new Rule 402(a)(3) somewhat cryptically provided that such filings “are subject to all other liability and anti-fraud provisions of these acts. . . .” [emphasis added] In November 2005, present SEC Chairman Christopher Cox, speaking at the 12th XBRL International Conference in Tokyo, declared us to be on the threshold of a “revolution in corporate reporting.”
He stated that his tenure as chair of the SEC (likely to terminate with next year’s presidential elections) would be marked by a modernization of all systems of corporate disclosure and financial reporting. For the SEC “corporate reporting was not an end in itself, but a means to achieving our missions. . . [of] protecting investors, and encouraging capital formation, and promoting healthy markets.”
The goals of this revolution were to level the informational playing field, and to provide liquidity for small and medium sized public companies. Then-available reporting structures, in the face of cost-cutting measures in the securities industry, significantly reduced the number of companies covered by analysts at Wall Street firms.
Since lack of coverage often translates into illiquid securities that suffer from a permanent discount on the stock price, it had been asserted that any method of improving available information for smaller companies would have salutary effect.
To date, approximately 42 public companies are providing XBRL financial statements to the SEC under the present voluntary regime.
What is it?
My favorite description of XBRL is contained in the October 2005 Executive Report of the Financial Executives Research Foundation:
“XBRL is not technology, but a set of standards, called taxonomies, built using the eXtensible Markup Language (XML). Like accounting standards that direct financial executives how to account for and report business transactions and financial information, XBRL directs executives how to report financial information in the electronic age so that all constituents accessing the data understand the information they are getting. It does not replace or affect the system of accounting standards, it enables computer translation of financial information that can be interpreted by any XBRL enabled user, essentially bar coding for financial information.”
XBRL manifests itself in financial reporting, which has commonly identifiable categories. To date, financial reporting under voluntary XBRL has been available in three flavors.
Some companies take their regularly generated financial reports and then additionally restate them by manually tagging these traditional entries into XBRL taxonomy. Other companies use an outside vendor to perform this tagging. Other companies have used generally available proprietary software to generate their financial statements in XBRL form in the first instance (so the only financial statements are those which are developed using XBRL imbedded software).
How many different separate “lines” of reporting (taxonomy) will be used? Obviously, enough will be used so that a detailed understanding of a business can be obtained, but not so much as to expose proprietary information.
Since numerous industries have their own special data sets, it was necessary to develop taxonomies on an industry by industry basis. Some reportable items would be in common across all industry lines, but many others would be unique.
On Sept. 25, 2007, Chairman Cox announced he had asked the SEC staff to “finalize the recommendation to the Commission that we could act on next spring, about how to deliver the maximum benefit of tagged data to investors, including converting all public company disclosure into interactive data format.”
Cox expects that the SEC would receive comments during the summer and would aim for a fall 2008 announcement of a final Rule which, in turn, would have its own phase-in timetable. Cox was emboldened to announce this specific timetable because during December 2007 a complete XBRL taxonomy, with tags that comprehend the full set of US GAAP financial concepts and practices, was introduced to replace the 2,500 tags currently in use. Presently, we are within the 120-day comment period on these tags.
A glimpse of the future can be had by going to the “XBRL reader” now appearing on the SEC’s website (it receives about 40,000 hits per week). The reader, whose source code software has been made publicly available by the SEC, permits scanning of XBRL reporting so as to pick out comparative data points.
In light of Chairman Cox’s promise to move forward promptly, what is happening in the marketplace? Aside from creating XBRL taxonomies, software developers are marketing voluntary filing programs with automated features. They claim these features should cut filing costs by moving fundamental corporate financial records directly into the ultimate financial statements without the necessity of processing, touching or reworking these numbers.
For their part, financial printers promise ease and economic efficiency in the move to XBRL. Financial printers can take your financial statements and “tag” the contents after you have prepared the financials “the old fashioned way,” and I have seen cost estimates of $5,000 per year (for the four financial filings).
I am told that financial software to imbed XBRL in the internal accounting systems has a $2,500 to $5,000 cost, plus training and related cost to be incurred. XBRL proponents claim that in the aggregate the technology should save money on a net basis.
Companies can start with a 10-Q report or 10-K report at any time. It makes no difference in cost or methodology.
How granular does XBRL get? Tagging numbers is one thing. How do you tag the MD&A and the footnotes?
The latest XBRL US taxonomy now under development addresses the formatting of footnotes and MD&A disclosures in order to allow extraction of comparative data. How well they succeed remains to be seen.
And for the future, certain aspects of SEC reporting will easily lend itself to the extension of XBRL, notably portions of proxy reporting, and the expanded compensation data. Beyond that, can the SEC “tag” pure business text? What are the SEC’s plans for a fully built-out XBRL future and what does it mean for today’s public company?
* * *
The Blaszkowsky factor
On Oct. 9, 2007, the SEC established a new division, the Office of Interactive Disclosure, headed by David Blaszkowsky, a manager and business analyst with a long history with Standard & Poors, Fidelity Investments and McKinsey & Company.
We asked David about his mission.
SEC Watch: What is your job, which is a brand new position at the SEC?
Blaszkowsky: To expand XBRL, as a means to provide better information to the marketplace. To reach the next level of EDGAR. EDGAR, together with the world wide web, increased the level of information available to investors. But EDGAR today is page-based; it’s words, character strings, not data. In XBRL, each accounting concept like “cash” or “accounts receivable” has a tag, but also a context or metadata. Everything in a financial statement or note gets its own bar code, essentially. Now you can deal with that financial item as a concept, giving it magnitude, or other attributes. Information will be available to everyone in real time. You don’t need intermediaries.
SEC Watch: Is the SEC pushing XBRL to help the Commission meet the SOX requirement that it review ’34 Act filings every three years?
Blaszkowsky: (laughing) XBRL provides access for data for many user constituencies.
SEC Watch: In the long run, do you see the future as consisting of dual filings of “traditional” “XBRL” financials, or will we end up with a single set of XBRL audited numbers?
Blaszkowsky: That’s not clear yet. Not in the short run. That question looks far ahead.
SEC Watch: Compliance Week has reported that 10-Ks and 10-Qs “will soon be a relatively small piece of the XBRL reporting pie.” What does that mean?
Blaszkowsky: We need to do our homework. We need to ask corporate counsel, corporate finance executives, investor groups, auditors. During this 120-day comment period on XBRL US, we are asking: Do we now have the right taxonomy for US GAAP reporting? What about our preliminary taxonomies for executive compensation and MD&A?
Shortly we will have a “comp reader” posted on our website, based on a proxy taxonomy. Does that work as for the investor? There are so many interesting data sets out there, and we need input, including industry-focused performance indicators. We can expand XBRL if we have good input.
SEC Watch: Do you have any message or suggestions that you want to share with in-house counsel today.
Blaszkowsky: Several. XBRL does not change any requirements for content, so there is no added filer risk. XBRL costs are trivial, and maybe even a source of net savings. XBRL is global. For example, it will be mandatory as of next April in Japan, and is heading towards implementation in many other countries. In other words, XBRL is here, and it is relevant for your client or corporation.
XBRL is a great opportunity to improve the quality of information for your current and prospective investors. Now is the time to learn about it and to figure out when to implement it. There are numerous webinars and tutorials available, and information is available also at www.xbrl.us. Review it, then have your financial reporting team review it, and then encourage them to try tagging with the new taxonomy.
The SEC needs more voluntary filers now, including small and mid-cap companies to help us learn more definitively what their experiences are. Contact Jeff Naumann at email@example.com for more information.
Stephen M. Honig is a member of Duane Morris’s corporate department in the firm’s Boston office. You can reach him at firstname.lastname@example.org.