The hottest acronym right now in the realm of business performance management (BPM) has to be XBRL. That’s not because it’s new; the concept has been around for a decade, and the acronym has been mainstream for several years.
In 2004, the SEC began to investigate the benefits of using XBRL tags to label each piece of data in a financial report. The idea is that if SEC filings were labeled with XBRL tags, public-company transparency would be vastly expanded. Software used by investors, market analysts, and competitors would be able to automatically gather data from online financial reports, then organize the data in a way that enables easy analysis and comparison of companies’ financials.
The timing of the SEC’s entry into the world of XBRL was not a coincidence. SEC staff publicly stated that the organization was considering this means of improving transparency as a direct result of the Sarbanes-Oxley Act and the financial-reporting scandals that led up to that law. Since early 2005, the SEC has allowed companies the option of submitting their financial information in an XBRL-tagged format — and ever since then, software vendors, consultants, and (yes) the business media have been beating the drum for the eXtensible Business Reporting Language.
What’s changed, then, to make XBRL such a buzzword all of a sudden? Many companies that have previously ignored XBRL now have to pay attention because tagging of SEC filings will likely be mandatory by the end of the year.
On Wednesday, May 14, the SEC voted unanimously to adopt a rule proposal to mandate the XBRL tagging of SEC filings of financial statements. If the rule is adopted this fall, the first companies affected by the change will be large, accelerated filers (those with a market cap of $5 billion or more), which will be required to submit reports in XBRL format for fiscal periods ending December 15, 2008, and thereafter. The XBRL requirement will be phased in until it encompasses all public companies, both domestic and foreign, that are listed on U.S. exchanges.
In addition, on May 21, the SEC approved a proposal to mandate XBRL tagging of risk/return information in mutual fund prospectuses. The goal of this rule is to simplify for investors the process of comparing investment objectives, strategies, risks, historical fund performance, and fees among funds.
Said SEC chairman Christopher Cox in February, “A standard data format for sharing financial statements and other information that is important to investors will facilitate the kind of comparisons among global investment options that investors need. The international movement to employ extensible business reporting language for this purpose will let investors easily find and compare business and financial data with the same ease of doing a Google or Yahoo! search today. And it promises to let companies prepare their financial information more quickly, more accurately, and for less cost.”
Whether companies will save money through XBRL tagging remains to be seen. But consumers of corporate financial information certainly stand to gain dramatically.
XBRL US, a consortium of software vendors, consulting firms, and other organizations interested in the future of XBRL in the United States, predicts that for preparers of financial statements, the XBRL reporting requirement will increase the time and costs involved in SEC filings in the short term. In the long run, though, XBRL US expects filers to benefit from improved data consistency and faster reporting, once their financial management systems include XBRL functionality. For investors, XBRL US believes that short-term gains may not live up to the current hype. However, the organization expects analysts and investors to benefit greatly in the long term, as tagged financial data improves both the accuracy and granularity of information available on public companies. XBRL US anticipates that once XBRL tagging becomes widespread, XBRL-formatted financial data will be in great demand by investors and market analysts.
When XBRL is finally prevalent in corporate financial reporting, it will be fair to say it’s been a long time coming. But it will probably also be fair to say it’s well worth the wait.
