SEC Proposal: XBRL Mandatory Within 3 Years

In an open meeting yesterday, the SEC adopted a rule proposal that would mandate the use of extensible business reporting language (XBRL) for some regulatory filings within three years. XBRL applies standardized electronic tags to financial data, enabling it to be more easily retrieved, exchanged ,and compared.

The proposed rule requires all companies using U.S. GAAP with a worldwide float over $5 billion -- the biggest 500 or so companies -- to make financial disclosures using XBRL for fiscal periods ending late 2008, and to post this information on their Web sites. Other companies using GAAP would be phased in over the following two years. Organizations using international financial reporting standards (IFRS) would be required to provide the disclosure for fiscal periods ending in 2010.

It's an aggressive schedule, but the U.S. regulator is playing catch-up with other countries around the world that have already mandated use of XBRL, as Robert D. Kugel noted in our March issue (in "XBRL: A Quick Primer").

SEC chairman Christopher Cox waxed nostalgic in his opening remarks to the meeting, recalling some comments filed in response to an earlier SEC technology initiative -- the electronic data gathering, analysis and retrieval (EDGAR) program, which went live in the mid-1980s. Some of the remarks are "quite entertaining," Cox said. "For example, back in the 1980s, some companies complained that since they have to print proxies and other documents for their shareholders anyway, preparing a diskette for delivery or filing over the telephone would create more work for the company.

"Others, particularly computer software companies, complained that the SEC system did not accept their brand of software or diskettes."

Finance executives may not find the new XBRL requirements quite so entertaining, though. Interest in the technology hasn't exactly been overwhelming; the SEC kicked off a voluntary filing program back in 2005, but only 75 companies have signed up. Many CFOs will see the new rule, if passed, as just one more set of regulatory hoops to jump through.

That's a pity, because interactive data has a lot to offer CFOs. So says Sunir Kapoor, board member of XBRL US, an umbrella organization of XBRL users and developers, and CEO of UBMatrix, a provider of XBRL solutions, who describes the announcement as "the best news Fortune 500 companies in the U.S. could have."

"XBRL isn't just about tagging data for external reporting," Kapoor points out. "It's all about how you manage your business with data which is held hostage in a variety of enterprise software applications. Every time a CEO of a company asks a CFO for information, versus just data, they go on an expensive crusade with a variety of folks in their organization trying to find the response to that request." XBRL will reduce the friction and the cost of complying with information management demands from the CEO and the board, Kapoor says.

And will these results be worth the cost? Kapoor points to banking industry, which has been using XBRL for its FDIC call reports since 2005, achieving "a ten times improvement in reporting efficiency." Whatever initial costs there are for complying with external filing requirements, "they are dwarfed by the benefit that comes from it over a very short period of time," he says.