Yet Again, SEC Pushes

Yet Again, SEC Pushes For The Adoption Of XBRL
By Melissa Klein Aguilar — February 7, 2006

n hopes of stepping up its effort to get companies to file their financial reports using interactive data, the Securities and Exchange Commission is sweetening the pot for companies that volunteer to be part of a test group with a plan to offer expedited reviews of registration statements and annual reports.

RELATED RESOURCES

View SEC Details Regarding XBRL Incentives (Jan. 11) Related Speech By SEC CIO R. Corey Booth (Jan. 18) Related Speech By Chairman Christopher Cox (Jan. 18) Contacts Companies interested in participating in the test group should contact the following individuals at the SEC: Jeffrey Naumann, SEC Office Of The Chief Accountant Brigitte Lippmann, SEC Division Of Corporation Finance Related Coverage So Far, XBRL Participants Are Those Who Stand To Benefit (May 2005) Tagged Data May Help SEC, But Will It Help You? (Aug. 2004) SEC Proposes Rule On Voluntary XBRL Reporting (Sept. 2004) Rules, Guidance Read The Proposed SEC Rule On XBRL Related Concept Release On The Use Of Tagged Data SEC FAQ About The XBRL Voluntary Filing Program Related Resources SEC Spotlight On Tagged Data, XBRL Initiatives

The move comes roughly nine months after the April 2005 SEC launch of a voluntary filing program under which corporate or mutual fund registrants can file their financial information with the Commission in XBRL—short for extensible business reporting language—a computer language that makes financial data interactive. Since the launch of the initiative, the SEC has only received 22 XBRL filings from nine companies. SEC officials admit that the response isn’t quite what they had hoped.

Booth

The program is “an important initiative, and I think we have pursued it appropriately,” SEC Chief Information Officer Corey Booth said in remarks at the XBRL-US National Conference in San Jose on Jan. 18. “I must admit, though, I had hoped that we would have more filers in the first nine months of the program.” In a further sign that XBRL isn’t yet setting the world on fire, the conference itself drew only slightly more than 200 attendees (see box at right for complete speech and related resources).

In announcing the new incentive, the Commission said it wants test group participants that will use the commercial and industrial, banking, insurance, or investment management industry classifications in XBRL. The staff expects to establish the group by some time in February.

Companies that participate in the test will have to file their reports in XBRL format for at least one year and provide feedback on their experiences, including the costs and benefits associated with reporting in the interactive data format. In return, volunteers will get expedited reviews of securities registration statements. Well-known seasoned issuer volunteers will find out whether the SEC will review their Form 10-K within 30 days after filing and the SEC staff will provide any comments on that filing within 45 to 60 days of filing.

Where's The Carrot?

Right now, more than 15,000 companies submit more than 700,000 filings annually through the SEC’s EDGAR system, nearly all of them filed in ASCII text or HTML. But the SEC has been pushing for the adoption of XBRL, citing potential benefits of tagged data such as greater transparency of financial information, reduced costs for investors and analysts, and possibly, broader analyst coverage of companies.

Getting filings in a machine-readable format would enable the SEC to review annual filings and develop ways of flagging troublesome companies more quickly, making it easier for the agency to meet one of its mandates under Sarbanes-Oxley: Section 408 of the Act requires the SEC to review the filings of all registrants at least once every three years. The information in SEC reports submitted in XBRL could also be made instantly searchable by both analysts and investors.

Ciesielski

Despite the various incentives, few companies have expressed enthusiasm for XBRL other than printers, software firms and investor-relations outfits that stand to reap some business benefit from the technology. For the rest of Corporate America, “it’s a little hard to see the carrot for them,” says Jack Ciesielski, owner of investment research firm R.G. Associates and publisher of the Analyst’s Accouning Observer. “This is something that is supposed to aid financial analysis and it probably will make it a lot easier for the SEC to do financial analysis. It’s probably got a low priority in companies” (see related article, "So Far, XBRL Participants Are Those Who Stand To Benefit," in box at right).

The latest incentives “will probably help” the SEC attract more issuers, says Dave Copenhafer, director of EDGAR Services at financial printing giant Bowne. Bowne was the first company to file its earnings releases in XBRL under the SEC pilot program. “We’ve had several expressions of interest that came about solely as result of SEC’s comments. Whether they translate into action, we’ll have to see.”

“The incentives change the dynamic of why companies will participate,” Copenhafer continues. “Before, the firms that filed were primarily technology companies of one sort or another that, for internal reasons wanted to understand [XBRL].” However, he said, “that doesn’t change the fact that it’s still difficult to get a set of corporate financials properly structured into an XBRL instance document. And the investment in resources to prepare an XBRL filing is still substantial… It’s not like turning a Word document into an html document.”

Savage

“There is definitely a learning curve and some time investment required,” in reporting in XBRL for the first time, notes Michelle Savage, vice president of investor relations services for PR Newswire and chair of the XBRL-U.S. Adoption Working Group. Still, Savage says, “once companies have the first quarter under their belts, it gets a lot easier.”

Booth at the SEC also acknowledged that major hurdles to broad adoption exist. For one, he said, preparers still need to “get comfortable with the technological aspects and the accounting aspects of the standard.”

“The preparation of XBRL statements is still perceived to be difficult and I believe there is also reality behind that perception,” noted Booth, who said the SEC’s examination of the filings received so far “suggests that there is still a lot of room for technical judgment and interpretation in how to apply the taxonomies to a particular situation.”

INCENTIVE

The excerpt below is from the SEC's Jan. 11 announcement that it was offering incentives for companies to file financial reports with interactive data: The Chairman of the U.S. Securities and Exchange Commission today announced that the Commission staff will offer expedited reviews of registration statements and annual reports to companies that volunteer for a test group as part of the Commission’s interactive data initiative. Interactive data holds the promise of transforming the static, text-only documents companies file with the SEC into dynamic financial reports that can be quickly and easily accessed and analyzed... Companies that participate in the voluntary program’s new test group will furnish financial data contained in their periodic and investment company reports in XBRL format for at least one year and provide feedback on their experiences, including the costs and benefits associated with reporting in the interactive data format. Because of the efficiencies staff anticipates in reviewing their filings prepared in XBRL and to encourage participation in the test group, the Commission staff will offer volunteers expedited reviews of registration statements under the Securities Act of 1933 that the staff has selected for review. For well-known seasoned issuers, the Division of Corporation Finance staff will offer to inform volunteers whether or not the staff will select their annual reports on Form 10-K for review. The staff will notify each well-known seasoned issuer volunteer whether it will select the volunteer's Form 10-K for review within 30 days after filing and will undertake to provide any comments on that filing within 45-60 days of filing. Source SEC Offers Incentives for Companies to File Financial Reports with Interactive Data (Jan. 2006)

Booth also cited the issue of a lack of demand from the investor community. While “not every retail investor or Wall Street analyst needs to understand the intricacies of XBRL in order to make use of it,” he acknowledged, “We are still are not seeing the kind of demand pull that would truly catalyze the market, and in turn make more companies interested in solving the supply-side issues.”

Toes In The Water

Another challenge to widespread adoption “has to do with the core XBRL technology itself,” and a question about how to get more effort behind evolving and refining the taxonomies. For example, Booth said rendering XBRL documents in human-readable format remains a challenge. In addition, validation standards can differ from product to product, which can raise questions about “whether your XBRL document is truly ‘kosher’.”

Savage and others offer other reasons for companies’ slowness in embracing XBRL. “Complying with Sarbanes-Oxley and making process changes has been consuming people for the last couple of years. It’s been a huge undertaking and a real tax on public companies,” Savage says. “That’s been a big factor in people saying, ‘It’s not critical, it’s a voluntary program’.”

Another hurdle, Savage says, is a common misperception about XBRL. “The name itself sounds like a technology change that finance departments, preparers and IR departments have to undertake, when it really isn’t. It’s a business process change,” she says. “One thing we’re (the XBRL adoption group) doing is looking at the positioning of XBRL to make sure the message we’re conveying is that this is a process change that will change the way companies report information.”

In his remarks, Booth offered one suggestion that might make the task less daunting. He suggested that participants in the voluntary filing program file just their main financial reports in XBRL at first, and begin providing XBRL footnotes “a quarter or two later.” SEC rules require participants to file the main financial statements in XBRL format, but they aren’t required to file the notes in XBRL.

“Maybe this kind of simpler, walk-before-you-run approach would induce more companies to stick their toes in the water,” Booth said. And eventually, companies may not have a choice—some expect the SEC to make XBRL filing mandatory sometime in the future.

Copenhafer

Copenhafer says a “viable alternative” to mandating XBRL might be for the SEC to give companies a template, “rather than having companies go through the difficult process” of constructing a complete XBRL document. He notes that a similar method was adopted by the FDIC, which requires member banks to report numbers in their call reports in XBRL using a template.

However, Booth’s remarks indicated that such an approach was unlikely. Noting that the SEC tried a similar “fill-in-the-blank approach” when it introduced the Financial Data Schedule, which captured key financial figures in tagged format as an addendum to company filings, he said, “It didn’t really catch on, and we discontinued it. The fact is that the universe of SEC registrants is extremely diverse, and we need to account for that.”