April 5, 2006

SEC Continues XBRL Push

With a series of XBRL roundtables coming up, the SEC announced last week that 17 companies have signed up to become guinea pigs for the new “incentives-based” XBRL pilot. As could be expected, a majority of volunteers have some vested interest in the success of XBRL – and interestingly, 3 Brazilian companies are on the list, obviously disproportionate to their representation among SEC reporting companies.

This is a more formal exercise than the original Spring 2005 pilot program. Under the new second pilot program, the 17 companies have volunteered to submit XBRL filings for all quarterly and annual financials for one year in exchange for “faster review.”

Some of the companies from the first pilot signed up for pilot #2 – and some did not (but for those that didn’t, their effort is ongoing and they can still submit XBRL documents at any time). So far, 10 companies from the original pilot program have submitted about 30 XBRL documents, of which only a handful contain the more complicated 10-K/10-Q financials (albeit many of the 8-Ks include the 10-K/10-Q financials; in such cases, the company concentrates on getting their filing made timely and then follows up later with the financials tagged in XBRL – remember these XBRL documents are not officially “filed”; just “submitted”).

Maybe I will be convinced otherwise at one of the roundtables or thereafter, but I still believe the best way for the SEC to move towards automated analyses is to adopt a templated approach to supplementing financial statements (perhaps using XBRL under the template). XBRL in it’s “raw form” is a very tough nut.

And I hope the SEC moves somewhat slowly, as it will take time to integrate folks from different departments into teams to pull this off. These teams will be broader in scope than today’s disclosure committees, as the IT staff and other technologists will have to get up-to-speed on certain aspects of financial reporting.

What Does XBRL Implementation Mean For a Company?

To get an in-house view of this all, I caught up with Jim Brashear of Sabre Holdings – one of those sharp lawyers who understands technology better than most – who had this to say:

“The simplest XBRL implementation is adding a step to the existing disclosure processes, which “translates” the work-product into XBRL formatting. Longer-term XBRL implementation might also involve making significant changes in the company’s accounting systems, internal controls over financial disclosure and other accounting processes.

Implementing XBRL disclosure may, therefore, constitute a “material change” in a company’s internal controls over financial disclosure, so adoption ought to be coordinated with internal and external auditors as part of the Section 404 assessment process. It would be prudent to do so with the knowledge of the company’s audit committee.

The company should involve the Disclosure Controls Committee early and often as it considers XBRL disclosure. Also, discuss XBRL planning with external vendors involved in your disclosure processes, such as your financial printer and provider of SEC filings on your company’s website.

The company’s existing disclosure teams will need to develop at least a basic understanding of XML before implementing XBRL. They should learn how to use tools that will integrate the company’s existing processes with XBRL reporting. For example, if the company uses Microsoft Office Word and Excel to develop its disclosure documents, the team members should become familiar with the XML functions in those tools. So, the company should provide appropriate training in its XBRL planning.

As the company increasingly integrates XBRL into its accounting systems, internal processes and external disclosure, it will also increasingly need to involve XBRL and IT experts. The company will need to consider the extent to which XBRL expertise will exist in-house, versus the company relying on external vendors.”

Speaking of an XBRL Templated Approach…

As I start to dig into what the XBRL alternatives are, I came across this interesting new service – called “EarningsDirect” – being offered by Business Wire in conjunction with CoreFiling.

This new service allows companies to adopt XBRL incrementally, via three “levels” of templates. And the good news is that the company creates the “instance” (ie. it doesn’t rely on an automated conversion that may or may not be very accurate). And I understand it’s pretty cheap too.

I like this phased-in approach because it will allow companies to take baby steps towards XBRL implementation that are not disruptive to their existing processes (read internal controls). As companies gain expertise, they can more fully embrace the external reporting process, with the ultimate goal of implementing XBRL upstream in their accounting systems.

The first step is called Level 1. The company submits its earnings report as it normally does, but also issues with it a PDF instance document with associated XBRL files, which are created from a Excel spreadsheet. The spreadsheet only captures standard data (not customized for the industry or company) – about 200 data points or so – but it gets the company into the XBRL reporting game. [The EarningsDirect service does not address the use of the XBRL tags in the news release itself, nor the use of XBRL tags in SEC filings. Rather, it just generates a supplemental PDF document with XBRL nodes.]

As described on this page, Level 2 (not yet available) would involve the use of Excel spreadsheets that are more customized for particular industries – and Level 3 (now available) involves the development of a customize taxonomy document for a particular company. Here is an example of a Level 3 preliminary earnings report from Reuters. If you open the Attachments tab in the PDF, you can see that there are attached an XBRL instance document, an XSD schema document and three XML taxonomy documents.

One burning question relates to presentation: “How do I know that whats in this file with all the angle brackets is the same as my earnings release that I’ve sweated blood over?” It appears the way that data is tied in the XBRL to the presentation on the page with TagTips (eg. hover over any of the numbers in the Reuters PDF above, using Adobe Acrobat Reader v7.0 onwards) is designed to resolve that concern.

As alluded to below, another burning question is: what’s in it for the company? True that the company will looks investor-friendly, but what if investors don’t use the information?

Is the Tail Wagging the Dog?

The question remains whether there are investors and analysts out there that are capable of consuming XBRL data today? We likely will – and should – hear about this topic during the SEC’s roundtables, but I think the answer is “not yet.” Perhaps another reason why there is no rush to push us deep into the 21st century – or maybe it’s more like “if we build it, they will come“? I miss the ’90s, back when I still had hair…

[Wow! Maryland Terps won the woman’s b-ball tourney last night in a great game; nice finish to exciting NCAA tourneys. Of course, it helps that I had picked Florida in my pool and won $200. Hadn’t picked a winner in a decade.]