Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Friday, May 26, 2006

XBRL – the way of the future, and for some, the way of the present.

The use of the XBRL format in presenting accounts has been proposed for many years. Has its time finally come, and what is driving it?

For those who missed it, XBRL is a language for the electronic communication of business and financial data which is revolutionising business reporting around the world. Its adherents claim it provides major benefits in the preparation, analysis and communication of business information.

The basic idea is that companies would prepare their accounts, and then attach a ‘tag’ to each item of data. The tags are pre-agreed through a taxonomy, and each tag tells a computer what the item of data is. This allows automatic processing of, for example, report and accounts by sell side analysts.

Such is the load at the moment on analysts simply rekeying numbers, that one major sell side firm has estimated that if all firms were to adopt XBRL, they would be able to double the number of companies they cover.

Some very heavy hitters are among those who are pushing its use. Christopher Cox, the Chairman of the SEC is a sincere believer. The SEC is now referring to the data that has been tagged as “interactive data”. They announced last week that the number of companies filing their mandatory SEC filings in XBRL has doubled – to 20, and includes General Electric Company; PepsiCo, Inc.and Banco Itaú Holding Financeira S.A..

Other examples of success in the use of XBRL. The Bank of Japan said that more than 500 financial services companies had been reporting to it in XBRL since March. It is already seeing a significant reduction in the burden of data validation. The Shanghai Stock Exchange announced that following the successful launch of its XBRL system for company reporting, covering data from more than 800 companies, it was extending its use of XBRL to cover fund information. The Spanish Securities Regulator CNVM has already received more than 12,000 company financial reports in XBRL, while more than 400 banks, some 90% of the banking sector, are now reporting in XBRL to the Bank of Spain.

So what is needed to make information available in XBRL? The biggest challenge for a company is the initial creation of the taxonomy. There are several software companies out there who will help, such as Rivet Software. And the news distribution services such as PR Newswire and others are geared up to file the XBRL document appropriately.

XBRL has still a long way to go. There are 3 areas of difficulty: the preparation of XBRL statements is still perceived to be difficult. Second we have not yet seen large growth in demand for XBRL information by the investor community. Third the taxonomies for companies across the world need to be evolved and developed, which will take resource.

Nonethless, there are some powerful forces – especially the regulators – who believe that interactive data in general, and XBRL in particular, is a great opportunity to help investors take full advantage of the information they are given, and to improve the efficiency of the financial markets. And with the ever increasing adoption, its time has surely come.

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