An SEC announcement in late July, innocuously titled “SEC Announces Initiative to Assess Benefits of Tagged Data in Commission Filings,” eventually could impact financial and legal executives of publicly held companies more than many realize.
The term “tagged data” refers to a financial reporting methodology in which individual figures are marked with standard accounting-industry identifiers. No longer is a financial statement viewed as a single block of text. Instead, each element—such as net income or long term debt—carries its own identifying tag.
Willis
“It’s like a UPC code for business reporting,” says Mike Willis, a partner with PricewaterhouseCoopers and founding chair of XBRL International in New York.
XBRL, which stands for eXtensible Business Reporting Language, is emerging as the standard tagging method. However, the SEC doesn’t endorse any particular tagging platform, notes spokesperson Matt Well.
Tagging data would allow investors, analysts, regulators and other interested parties to instantly sort and analyze financial information. For example, companies and financial statement users would more easily be able to compare results within industries and geographies by extracting and analyzing comparable information from public statements.
However, others note that the true costs and benefits of data tagging have yet to be determined.
Behind The Announcement
Several drivers prompted the announcement, says the SEC’s Well. For starters, tagging technology, which has been around since the late 1990s, is maturing.
In addition, Sarbanes Oxley now requires the SEC to review the more than 10,000 publicly held companies in the U.S. once every three years; previously, no set schedule was mandated. “XBRL will allow for more efficient reviews and increase the depth of the reviews,” says Well.
In theory, investors and analysts also would be better able to evaluate financial information. That’s apparent from the few companies who have published reports in XBRL.
Reuters, for example, has some of its reports available in XBRL. By viewing the data through an XBRL-enhanced tool, one could—for example—search for specific historical data, rather than manually combing through multiple reports for the same data (see download in box above, right).
Financial statement users would also be able to almost instantaneously translate financial data into different currencies. “It’s a case where technology is helping us get better transparency in financial reporting,” says Mark Schnitzer, executive director with Morgan Stanley, New York.
Some of these benefits extend to publicly held companies themselves. Financial executives should find it easier to assemble the data they need for their own internal reporting needs. “When used internally, it [data tagging] can increase the volume, quality and accuracy of information,” says Willis.
In addition, XBRL could eliminate the need to create separate reports and spreadsheets for the SEC, Internal Revenue Service, Department of Labor, and other regulatory agencies. Instead, corporate accountants could electronically “pull” the data from a central repository and dynamically create the required reports. Contrary to what some may assume, the move to XBRL doesn’t require companies to report additional information, says Schnitzer of Morgan Stanley. “It makes more readily accessible the information that’s already disclosed.”
Hamscher
As a result, XBRL allows company executives to more effectively communicate with their investors, says Walter Hamscher, chair of the XBRL U.S. Adoption Working Group. Companies can “provide detail in a way that’s less likely to lead to misinterpretation,” he says.
Downsides And Time Frame
According to the announcement, the Commission also is looking for comments on the costs and benefits of tagging. In addition, the SEC may allow public companies to voluntarily file “tagged” financial statements using XBRL for the 2004 year-end reporting system.
Zacarias
While the SEC’s announcement certainly gives XBRL and the broader movement to tag data a shot in the arm, it may take several years for the full impact to materialize. Perhaps 100 to 200 of the largest public companies will participate in the pilot for the 2004 filing season, estimates Martin Zacarias, chief executive officer of 10K Wizard Technology in Dallas, Texas. Over time, more companies will join in, and eventually, the SEC could make XBRL filing mandatory, Zacarias adds.
Others are more circumspect. Ed Hodder, a Cleveland-based research analyst with document management company Bowne & Co., New York, notes that he has yet to see a viable commercial release of software that’s capable of doing XBRL.
Copenhafer
“We are advising caution every chance we get," says Dave Copenhafer, Bowne’s director of EDGAR services. Few appreciate XBRL’s complexity, he says. For instance, using XBRL to tag data in even a small financial report can add hundreds of key strokes.
In fact the claim by some in the XBRL community that a few companies, such as Morgan Stanley, have been reporting in XBRL for several years, is a bit of an overstatement. According Schnitzer, the company prepared and submitted its year end financial statements for 2000, as well as a later 8-K, using an early version of XBRL. “What we did was really in a pioneering fashion,” says Schnitzer. “It would not apply to how a company would do XBRL in the pilot now.”
Finally, there’s the price-tag. While it’s difficult to say how much it might cost different companies to prepare their financial statements using XBRL or another tagging convention, Zacarias of 10K Wizard says the price range could be in the tens of thousands of dollars.
That number could go up for some firms, says Copenhafer of Bowne. If a company needed to install a new accounting system that would allow financial data to be stored in a tagged format, the cost could reach six or seven figures.
It’s difficult to predict how quickly XBRL or another tagging convention will move into the mainstream and what the costs could be. One thing is clear: financial and legal executives at publicly held companies need to remain on top of the issue, and offer their input to the SEC and other parties. “CFOs need to get educated on XBRL,” says Copenhafer. “They need to find out what this is all about.”
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