XBRL: Who Will Use This Stuff?

When Christopher Cox, former chairman of the Securities and Exchange Commission, heralded the arrival of XBRL technology last year as the greatest advance in financial reporting in 20 years, he declared: “Interactive data will enable new analysis tools to put key information at every investor’s fingertips within seconds, exactly as the investor wishes to see it.”

Investors and analysts have since celebrated this regulatory milestone with an extended, gaping yawn.

Tittsworth

“We have not really heard anything from our members about the XBRL rule and how it could affect them,” says David Tittsworth, executive director of the Investment Adviser Association. “My guess is that will take some time before the impact of the new rules sinks in.”

Mike Rohan, CEO of XBRL software developer Rivet Inc., adds that while his company is swamped with demand from businesses transitioning to XBRL-based filings, “We just don’t see any enthusiasm at all from the analysts.”

Rohan

That’s not to say XBRL is unimportant. Nearly everyone in financial reporting agrees that moving from text-heavy financial filings to machine-readable data files will reduce errors, accelerate investors’ access to financial information, and allow more sophisticated analyses of corporate performance. But few believe that revolution is going to happen right away—least of all, investors and analysts.

Some of the apathy is a matter of timing. The SEC rule mandating XBRL states that about 500 of the largest U.S. public companies will comply first, filing XBRL-tagged statements with their quarterly and annual reports as of this June. A second phase of another 1,200 large filers will follow in 2010, and the remaining several thousand public filers (domestic and foreign registrants alike) will bring up the rear in 2011. Even then, each group will have one year’s grace period before it must start tagging detailed disclosures within footnotes and schedules.

That means investors must wait until at least the latter half of this year for the first XBRL filings to trickle in; most companies won’t start using XBRL for at least another two years. Even then, several years’ worth of data will need to accumulate before XBRL “reader” software tools, such as Rivet’s Crossfire Analyst, have any real utility for investors.

Doggett

“It’s really when you get into Phase 2—and really Phase 2 plus the detailed note disclosures—when it’s going to have the biggest impact for people looking at detailed fundamental analytics,” says Glenn Doggett, a senior policy analyst at the CFA Institute. Over the long term, he says, analysts would like to see other sources of financial data—above all, earnings releases—incorporated into a more comprehensive XBRL-based financial reporting regime.

Then there’s the quality of the interactive data itself. The taxonomy of XBRL tags for U.S. Generally Accepted Accounting Principles was drafted by the XBRL U.S. consortium, which has repeatedly stressed that the taxonomy is both robust enough and flexible enough to handle the diverse range of financial information companies might report.

Savage

“XBRL is not about changing what companies report,” says Michelle Savage, XBRL U.S.’s vice president of communications. “It’s about reflecting current reporting standards and putting it all in a format that makes the resulting information much easier to use.”

But connoisseurs of financial data have somewhat totalitarian tastes; the more rigid a system is, the more easily comparisons can be made. The CFA Institute surveyed 850 analysts in 2007 and found that a whopping 91 percent believed companies should have limited or no ability to create XBRL tags for their data.

Holes in Meaning

Linder

Eric Linder, a former equity analyst and now head of SavaNet, a software company that makes XBRL tools for financial analysts, says comparability will definitely be an issue. “The problem with the SEC format is that it doesn’t have enough structure to it,” Linder says.

SEC XBRL APPROVAL

SEC Approves Interactive Data for Financial Reporting by Public Companies, Mutual Funds:

“Interactive data will help provide investors with the information they need, rather than just a warehouse of forms on which they can try to find it,” said SEC Chairman Christopher Cox. “Interactive data will enable new analysis tools to put key information at every investor’s fingertips within seconds, exactly as the investor wishes to see it.”

For public companies, interactive data financial reporting will occur on a phased-in schedule beginning next year. The largest companies who file using U.S. GAAP with a public float above $5 billion will be required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2009. This will cover approximately 500 companies. The remaining companies who file using U.S. GAAP will be required to file with interactive data on a phased-in schedule over the next two years. Companies reporting in IFRS issued by the International Accounting Standards Board will be required to provide their interactive data reports starting with fiscal years ending on or after June 15, 2011.

Companies will be able to adopt interactive data earlier than their required start date. All U.S. public companies will have filed interactive data financial information by December 2011 for use by investors.

John White, Director of the SEC’s Division of Corporation Finance, said, “The adoption of the interactive data requirement represents the product of more than three years of research, analysis and testing through our voluntary filing program—as well as the work of many people throughout the Commission. Interactive data is ready now for companies to provide, and for investors to use in their decision making.”

Mutual fund investors will begin reaping the benefits of interactive data starting in 2011. Mutual funds will be required to begin including data tags in their public filings that supply investors with such information as objectives and strategies, risks, performance, and costs. This will allow investors to compare more than 8,000 mutual funds at the click of a mouse. A mutual fund also would be required to post the interactive data on its Web site, if it maintains one.

“This action will continue the Commission’s strides towards using technology to provide investors with increased access to information about mutual funds,” said Andrew J. Donohue, Director of the SEC’s Division of Investment Management. “Just last month, the Commission adopted a new mutual fund disclosure framework that will provide investors with key mutual fund information in a concise, plain English format, while using technology to retain the comprehensive quality of the mutual fund information available today. Similarly, the rules adopted today will allow investors, through technology, to compare and analyze information among the array of funds offered in the market.”

SEC Chief Accountant Conrad Hewitt said, “Accounting is the business language of the world. Interactive data has the potential to greatly enhance that language, making it easier, more informative and more readily available. Traditional financial statements that we have today will become more transparent and understandable as interactive searchable documents.”

David M. Blaszkowsky, Director of the SEC’s Office of Interactive Disclosure, added, “The availability of financial reports in the form of interactive data will transform how investors evaluate companies and securities and, more broadly, transform the relationship between the filer and the investor. Markets depend on and improve with better information, and even more so in difficult times. This action by the Commission is timely and welcome for investors in the U.S. and all over the world.”

The SEC earlier this year unveiled its new financial reporting system—IDEA (Interactive Data Electronic Applications)—to accept interactive data filings and give investors faster and easier access to key financial information about public companies and mutual funds. The new IDEA system is supplementing and eventually replacing the agency’s 1980s-era EDGAR database, marking the SEC’s transition from collecting forms and documents to making financial information itself freely available to investors.

Investors can begin seeing this new information at http://idea.sec.gov. For participants in the SEC’s Voluntary Filer Program, investors can find clearly labeled buttons taking them to a company or mutual fund’s voluntary interactive data submissions. As soon as companies and funds make their mandatory interactive data submissions to the SEC, their financial information will be immediately available to investors through the SEC’s IDEA system as well as on the Web sites of companies and funds disclosing the data.

Source

SEC Approves XBRL for Financial Reporting (Dec. 18, 2008).

The issue is not so much the overall concept of XBRL filings, he says, but rather the relative lassitude of SEC and Financial Accounting Standards Board reporting standards. “You can drive a convoy through their definitions, there are so many holes in them,” Linder says.

Linder gives the example of a filing he found in the SEC’s voluntary pilot XBRL program. A large company had created its own “extension” tag for a current liability—that is, a tag that would only apply to that company—when the item should have been tagged in the existing XBRL taxonomy as debt.

“My worry is that some weekend-warrior investors are going to try and calculate debt-to-equity ratio and get the wrong results,” Linder says.

Finding those deviations and correcting them will require manual searches of companies’ XBRL extensions, “which defeats the purpose of XBRL,” Linder says.

The XBRL taxonomy for U.S. GAAP can trace some of its ancestry back to data-crunchers like Edgar Online, which for years has pored over financial data to split and re-organize it in any number of ways. Phillip Moyer, Edgar Online’s CEO, says the XBRL transition will indeed provide clients with increasing detail and comparability more quickly. But, he adds, pressure from both regulatory bodies and the investor community eventually will force companies to conform to common tags. In addition, he said, industries themselves may find ways of better communicating results and press for changes.

Moyer

“You have to start with at least a set of tags and the political will to make things better,” Moyer says. “This is a journey.”

All that leads some to question how much Cox’s vision for XBRL can ever be realized. James Marlatt, a former Arthur Andersen partner and now accounting professor at the University of Colorado, says getting truly better financial data would require companies to report their performance in greater detail—something they may not be thrilled to do, he adds.

“For external users, it would be a panacea,” he says. “But it’s not going to happen for a long time.”

Pawlicki

Amy Pawlicki, the American Institute of Certified Public Accountants’ XBRL lead, counters that XBRL immediately gives extra detail to a line item, providing information such as dates or currencies as a matter of course. That lets analysts explore whether companies are really reporting apples to apples, she says.

In addition, she believes XBRL will accelerate reporting convergence, in terms of both rooting out long-standing inconsistencies and making U.S. GAAP and International Financial Reporting Standards more compatible.