Tuesday, July 11, 2006

SEC: Tag You are It

The Securities and Exchange Commission has been a high profile supporter of modernizing the computer reporting language for public companies. Among other initiatives the SEC endorsed XBRL - a data-tagging format that makes financial data readable by computers. It is sort of a bar coding concept that would make it easier to for users to automatically read and select data from 10Ks and 10Qs.

As research analysts covering small capitalization companies we view XRBL as a huge boon for smaller companies to get greater exposure in financial databases. At this time balance sheet, income and cash flow data must be entered into databases by hand. Much of that work has shifted to low wage economies like India, but there are still a number of small companies that simply get left out or the data is wrong. An associate in my firm discussed the benefits of XRBL for the smaller company in a market paper entitled “XBRL: A Small Cap Advantage.”

The XBRL movement has a long history and progress in spreading its use has been slow. The SEC set up a test program two years ago, but has managed to persuade only twenty firms to participate. Microsoft and Intel were early adopters and General Electric Company just signed up. Participants in the test get expedited reviews of the SEC registration statements and annual reports in exchange for taking the extra step of tagging their financial data in XRBL format. The SEC is expecting feedback from the participants to get a better grasp of how to improve the interactive data program.

The SEC has not been along in its promotion of XBRL. The federal Joint Financial Management Improvement Program endorsed XBRL five years ago for financial reporting. Recently the Federal Deposit Insurance Corp. (FDIC) set up its Call Report Modernization Project.

XBRL is short for Extensible Business Reporting Language, a computer language that has been around for several years. One of the most time consuming elements in setting up XBRL tagging, has been developing the taxonomies - that is the data categories or definitions. “A rose by any other name is still a rose” does not apply in the financial world. Thus, it is imperative that each company reports sales as sales and direct costs as direct costs. Of course, those two categories are easy to establish appropriate categories and sub-categories.

The FDIC is bringing in Unisys Corp. to develop XBRL taxonomies for its call reports, which is expected to be completed by the end of 2007. Financial reporting taxonomies are being developed under the supervision of XBRL International, a worldwide consortium of companies and agencies interested in promoting interactive financial data. The Financial and Accounting Standards Board has been cooperating with the XBRL group, but progress has been slow as neither organization has had the manpower to support a rapid development program.

It appears to only a matter of time before XBRL becomes commonplace. Once the taxonomies are completed, the next step will be availability of affordable software for both data generators (public companies) and data users (analysts, accountants, etc.). Free XBRL readers are already available for users and there are business software packages that could be used to generate EDGAR filings with embedded XBRL tags.

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