The U.S. Securities and Exchange Commission (SEC) is in the process of implementing a rule that will make it easier for investors to access and analyze the data contained in the reports that companies are required to file. The key to making this possible is a technology known as eXtensible Business Reporting Language (XBRL). Creating reports using XBRL makes it possible for the financial statement information to be downloaded directly into a spreadsheet, enabling analysis of the information without the user having to manually key in the data.
The precise timing of the implementation of the new rule is not yet clear, but it is almost certain that within the next couple of years most if not all filers will have to provide their numbers in the XBRL format for core financial statements such as the organization's income statement, balance sheet, and cash flow as well as for a considerable amount of the information contained in the footnotes to these documents (such as the assumed depreciation rates for each asset class, advertising expense, executive compensation details, and pension fund liability details).
All concerned should be concentrating on two aspects of this XBRL-enabled reporting mandate. CFOs and controllers at public companies must determine how best to handle their reporting requirements — in particular, whether to do their XBRL tagging in-house or to outsource it. And now that this wealth of information is about to be readily accessible, everyone should start thinking about how they can use it to acquire competitive intelligence more easily, keep tabs on customers, and do internal benchmarking.
Public companies beginning to address the issue of XBRL-enabling their financial statements have two choices: They can do it themselves or outsource it. If the latter, financial printers such as Bowne, Donnelley, and Merrill, which already render company statements into XML format for publication on the SEC's EDGAR system, are offering tagging services. The advantage of choosing this option is the same as with any outsourcing: There's virtually nothing to think about — no training, no software to purchase, and very little if any time spent by the finance department in satisfying this requirement. Whether it is worth the cost will depend on pricing structures and an individual company's circumstances. And depending on how the SEC structures XBRL filing deadlines, your company might find this approach useful if it finds that it must complete its financial statement preparation sooner than previously was the case.
As for your company doing it itself, Ventana Research tested software tools to determine how difficult and time-consuming the process would be of applying XBRL tags to basic financial statements. We found the software relatively easy to master and that it would take a relatively small amount of time to fully tag the basic financial statements. However, tagging the footnotes manually with these tools could become laborious because most larger companies have hundreds or thousands of data points that must be tagged every quarter and every year. But we expect that within the next 2 years the major software reporting tools companies, including Business Objects/SAP, Cognos/IBM, and Hyperion/Oracle, will facilitate the XBRL tagging of data that are stored in enterprise systems. This will take care of most, but not all, of the information included in SEC filings. This is because not all of the information included in footnotes is kept in enterprise systems. Some of this data typically is prepared and kept in spreadsheets (for example, stock-based compensation, acquired intangible assets, and leased facilities).
Another in-house approach to satisfying the new SEC mandate involves automating more of the close-to-file process while at the same time automatically applying XBRL tags to the appropriate data. There is already one software package that does this (see the table), and we expect that more will follow. The strong argument in favor of choosing this approach is that for larger companies, assembling the periodic external reports typically is an inefficient and error-prone process of cobbling together information from dozens of data and text files. We suspect that “We've always done it this way” is the main reason that companies have not considered changing. The XBRL tagging requirement offers an excellent opportunity to rethink and redesign how your corporation manages the process.
For all companies, the SEC requirement will make it far easier to collect information about competitors, customers, and suppliers and use it to manage your business more intelligently. Your company may decide to collect this information centrally and make it available with other business intelligence data, or individual business or financial analysts can use the information in a competitive intelligence or benchmarking analysis spreadsheet that they compile. Our research finds that in the vast majority of corporations, people do not have nearly enough information about how their competitors are performing and indeed have limited data about what is going on outside their company.
The new reporting requirements by the SEC will be a burden for most companies. If you are subject to the rules, you should examine all of the available alternatives to determine the best short- and long-term solutions. We expect, though, that over the long run automating the close-to-report process will make sense for many companies. We also strongly recommend that your company consider how to make best use of this soon-to-be-accessible trove of data that can provide deeper insights and enable managers and executives to manage their business more intelligently.
See a larger version of "At a Glance: Who's Who in XBRL Technology."