So, it’s official (see point 2. in the EDGAR modernization announcement). The SEC is really serious about improving investor and regulator analytic capabilities. The decision by that agency to fund the completion of the US-GAAP XBRL taxonomies to the tune of $5.5 million is a huge signal about just how committed they are. The speed with which this has been executed has been head spinning, and congratulations go to all those within the AICPA as well as the XBRL-US steering committee for responding to the SEC so quickly. Particular applause to everyone involved for ensuring with finality that the taxonomies will be royalty free and publicly available. Period.

The message to listed companies and investment funds in the US is that the last actual barrier to XBRL going mainstream is to be knocked down over the next 12 months.

Many will interpret this step as a message about XBRL filing becoming mandatory in the United States. I’ll let the SEC decide that. I think what it does do is directly and indirectly ensure that the infrastructure, know-how and education exist to allow XBRL to become ubiquitous. Ubiquitous infrastructure gets used. I guess you could ignore these developments. But it would be a “courageous” move. Chairman Cox seemed to indicate exactly that on today’s web cast.

Taxonomies, for those not yet in the know, are dictionaries of financial reporting concepts, containing links to authoritative literature as well as labels (in multiple languages). Just as important are links between concepts, which build up a network of information about a financial metric – where it’s presented, which calculated concepts it contributes to, and how it relates to similar concepts in other taxonomies. Since you can wire these dictionaries together, it’s possible, in a manner not unlike a loose leaf folder, to add in concepts that relate to your particular reporting requirements, including the manner in which you present your performance to the world. A first, and really very large, step is the construction of the base taxonomies.

We are talking here about US-GAAP but there are other very significant “base” taxonomies built up by the International Accounting Standards folk for IFRS (used by most of the world outside of the US) as well as in Japan.

The US-GAAP taxonomies, like most others, have, to date, been the product of volunteer effort. As the XBRL community around the world has learnt, this is an exceedingly difficult process to manage and even harder one to complete. Base taxonomies should be created by paid-for experts. Not willing but time-constrained volunteers. The current XBRL-US GAAP taxonomies are a great start and they have been put together by a number of very skillful volunteers. However, like others, we have found a huge number of missing sections, which in effect makes what should be company-specific extensions to the base taxonomy a combination of those kinds of legitimate extensions and necessary, but annoying, add ons that paper-over some of the gaps. The task is too big for a volunteer effort. So the SEC’s initiative is a fantastic step forward.

Of course it is possible to create your financial statements in XBRL today. You should. This initiative of the SEC guarantees the importance and urgency of IR departments and financial controllers coming to grips with the process. The finalization of the US-GAAP taxonomies will improve the process, speed things up and enhance comparability. Bravo Chairman Cox!

By the way – congratulations to both Microsoft and Rivet Software. Both companies have been very active in the XBRL consortium for a very long time and their efforts have paid off – they are both part of the team that won the other (larger) contract announced today for the modernization of EDGAR.

Update

Lots of attention on this subject, including here, here and here. Not to mention here. (Great post! Yup – that’s why we’ve been working on making XBRL a reality for all these years). But please ignore those media stories that say this is an annoucement about mandating the standard. It isn’t. Just yet.