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Another Step Forward for XBRL Adoption

Todd Neff | September 25, 2007

Extensible Business Reporting Language, the much-touted and little-used computer language the Securities and Exchange Commission hopes will revolutionize financial filings, takes another big step forward this week with the debut of its latest incarnation.

SEC Chairman Christopher Cox is set to announce a new “taxonomy” of XBRL terms used to classify financial data—which, in theory, should make today’s text-laden financial reports far easier to present and read online. The taxonomy contains 15,000 elements, compared to only 2,500 in XBRL’s previous incarnation, and will be open for technical scrutiny as of this week.

Cox has been pushing XBRL as the next big thing in financial reporting since 2004. Essentially, XBRL “tags” individual pieces of financial data so they can be more easily presented in an online financial report. For example, Microsoft—a strong proponent of the language—would tag the number 51,122,000,000 as revenue, so people reading the report could quickly identify it as Microsoft’s 2007 sales.

With the proper taxonomy, XBRL enthusiasts say, the language could encompass all manner of financial data, from inventories to contingency accounts to payroll. And with the right software on users’ computers, XBRL could give rise to powerful new data analysis tools, allowing investors to pore over financial reports and quickly compare them with other companies.

That said, only a few dozen companies are participating in the SEC’s pilot program for filing statements in XBRL. By comparison, more than 10,000 public companies file quarterly, annual, and other statements at a rate of some 700,000 documents each year on the text-based EDGAR system that the SEC uses today.


Cox

Cox is scheduled to announce the new XBRL taxonomy at the SEC offices in New York on Sept. 25, along with officials from XBRL US, the industry consortium that developed it. While the taxonomy will not be available for public inspection yet, it will be submitted to the Financial Accounting Standards Board, major accounting firms, analyst firms, and others for technical review.

The old taxonomy for voluntary filers was the product of a volunteer effort led by XBRL US. Earlier this year, however, the SEC stepped up its commitment with a $5.5 million contract to develop the new, more comprehensive system. A principal complaint about the old one was that its definitions were not diverse enough to match the wide range of financial data that companies might include in their reports; the new taxonomy is intended to solve that problem.

Microsoft, for example, found 600 items in its financial statements that had no identity in the old XBRL taxonomy, says Mark Bolgiano, president and CEO of XBRL US. “I don’t know if we’ll get that number down to zero, because they’re the only company in the world with Xbox sales in their revenue statements,” he quips. “But we’re taking a huge step forward in compatibility.”

Liberty Media has joined Microsoft among the companies incorporating XBRL sooner rather than later. Liberty aims to have its first interactive data filing to the SEC by the end of this month. (Filers submit their XBRL statements in addition to, rather than in place of, regular filings.)

“I guess our expectation here is it’s going to be mandatory within a year or two, and rather than wait and have to compete with thousands of other companies, we’d rather get ahead of the curve,” says Mark Burton, Liberty Media’s vice president of financial reporting.

Burton says he’s doing most of the work himself. “I haven’t found that it’s that difficult conceptually,” he says. “I think it’s been relatively straightforward and easy to implement.”

Exelon Corp. became the first utility to join the SEC’s voluntary program in June. Sabrina Miller, a spokeswoman for the company, says Exelon “recognized that this mostly likely would be an industry standard, and we wanted to participate and be involved in the development of tags, tools, and standards.” Initial filings that initially took weeks to prepare are now done in a matter of days, she says.

Burton occasionally calls for tech support from Rivet Software, which in September 2006 won a $250,000 contract from the SEC to create a “reader” program that can present XBRL data. Rivet has worked with roughly half the companies filing voluntarily, says Mike Rohan, CEO of the company.

The XBRL reader, posted on the SEC’s Web site, receives about 40,000 visits per week. The Commission also posted the source code of the application online last week. Jeffrey Naumann, an SEC technologist working on the XBRL program, says that ideally, other software companies and enthusiasts will use the code as a foundation to create more XBRL tools.

The ‘Pain in the Butt’ Part

Despite apparent progress, achieving Cox’s vision of transforming the text-based EDGAR filing system with XBRL filings remains a far-off goal. The stubborn obstacle? According to Rohan, it’s the taxonomies.


Kugel

Current taxonomies remain limited to basic income statement, balance sheet, cash flow, and shareholder equity data,
which professional analysts (and skilled amateurs) already can lift from tables in text filings without too much effort. According to Robert Kugel, senior vice president at Ventana Research, professional investors would find it much more valuable to tag Management Discussion and Analysis, footnotes, and other more unstructured portions of SEC filings.

But those sections of company reports are “more of a pain in the butt,” Kugel says, “because, quite frankly, they don’t come in a predigested table like an income statement, where all you have to do is copy, paste, parse, and extract.”


“I haven’t found that it’s that difficult conceptually. I think it’s been relatively straightforward and easy to implement.”


— Mark Burton,

VP of Financial Reporting,

Liberty Media



Bolgiano says footnotes and disclosures are tagged in the latest XBRL US taxonomy under development.

Kugel also praises the CFA Institute, which is an industry voice for market analysts and financial experts, for its work in building XBRL’s reputation in stock analysts’ minds. “It’s extremely important for analysts to be involved in the process, because they’re the ones who are going to be consuming this stuff,” he says.

The Mandate Rumor

Truly widespread adoption of XBRL will require mass conversion to the language, which Naumann says may require an SEC mandate. “You really need everyone to move at once to get critical mass,” he says. “No analyst firm is going to invest in a whole XBRL process to assess 10 percent of the companies they cover.”

The question of an SEC mandate has long been on financial reporting executives’ minds, although Cox has consistently said he would rather avoid such a move. Plus, with one seat on the Commission vacant, a host of other pressing regulatory issues to settle, and only 15 months left before a new White House administration, the SEC has plenty of other things to worry about already.

Bolgiano says the SEC would open a public comment period once it is satisfied with the results of the technical review.

Ric Marshall, chief analyst at The Corporate Library, says the move from EDGAR to XBRL will be no less significant than the switch from paper reports to the EDGAR online database 14 years ago.

Even the incremental costs incurred by companies in the voluntary filing program will go away once XBRL is the norm, Marshall says, since XBRL is laden with automated features that should cut filing costs—and the number of hands touching financial data before the statements are filed.

“It’s something that’s going to happen,” Marshall says. It’s just a question of when.”