Interactive Small Caps

Interesting take on XBRL for small caps and microcaps on the SEC’s Government-Business
Forum on Small Business Capital Formation
being held today.

According to speakers including Malcolm C. Persen, CFO at Radyne Corporation, Chris
Whalen
from Institutional Risk Analytics and Greg Adams from EDGAR Online, Interactive
Data will help new investment vehicles such as hedge funds, and the buy-side
generally, to access small and micro-cap companies as a hitherto-ignored asset
class. Fund managers are looking for a competitive edge, and the small-cap
world is believed to offer that. Investors like the Virginia Retirement System
would feel that they are better able to cover those types of stocks if a lot of
the labour-intensive work can be avoided. XBRL offers a way for them to gain a
better understanding of the business, without incurring a lot of the complexity
and expense that they encounter today.

In fact, all the points from Assoc. Prof. Deborah
Allen-Hewitt
, who sits on the Investment Committee of the Virginia
Retirement System, were well made. From her perspective (backed up by Chris
Whalen) the problem is not too few analysts on the sell side. The sell side is
likely to continue to focus on the big end of town. The entire investment world
will become their own analysts, and Interactive Data will make the financials
more pervasive, facilitating that analysis and investment. This is a new
business model for financial analysis. According to Prof. Hewitt, XBRL could
mark a watershed in the speed, accuracy and availability of information. That
said, investors want something new. Broader, deeper data about companies is
what investors really want to see, and XBRL provides a great way to provide it.

There are 15,000 odd companies that are outside of the Russell 3000. According
to the panel, Interactive Data will help small companies make their story
because the information will be better, more believable and more transparent.
It will help investors sift this information, which is why there is a real
advantage in being an early adopter. The first group of small companies to get
involved will be the first to be identified.

Unsurprisingly, there was a uniform call for improvements to tools that the
user community can take advantage of. We’ll see if we can do our bit 😉

Making Sun (Even More) Transparent

Jonathan Schwartz’s post about the problems with transparency was interesting. There is a simple answer of course – stop innovating and then performance reporting can stay absolutely static 😉

Specifically though, Sun’s admirable drive for transparency could be pushed along with some hard numbers, internet style. The SEC’s voluntary filing program for XBRL (which got a huge push earlier this week) is the perfect opportunity to experiment. You don’t have to publish your interactive data at the same time as your earnings release, or your 10Q/10K. You can start and stop when you like. You do need to make sure you publish valid information, but that’s not so hard. You can even make it accessible (needs Acrobat 7.0 or better) to the masses.

It seems to me that blogs like Jonathan’s go down incredibly well with customers, prospects and partners. And probably makes competitors green with envy.

But will they make an impact with Wall Street analysts? Certainly. For the tech-savvy ones. To get the rest it is important to connect the strategy (that Jonathan is articulating in a very clear manner) with performance metrics. Obviously, not all of those metrics are in the financial statement — they are more the preserve of the MD&A. And, as Jonathan points out, the market shifts and the technology changes, which means that KPIs that were relevant yesterday are far less so today.

One approach, which seems like a step forward, is EBR. An initiative of the AICPA, the Enhanced Business Reporting Consortium seeks to provide a market, rather than regulatory, framework for the agreement and publication of standards for performance reporting. The EBR goals seem commendable:

  • Give the capital markets relevant information
  • Eliminate stale and redundant disclosures
  • Make information easier to use
  • Collaborate with users and suppliers of capital; and
  • Enhance the integrity of the capital markets.

And are fully in line with the common sense of one of our main ultimate shareholders:

"At Berkshire, full reporting means giving you the information that we wish you to give us if our positions were reversed. What Charlie and I would want under that circumstance would be all the important facts about current operations as well as the CEO’s frank view of long-term economic characteristics of the business. We would expect both a lot of financial details and a discussion of any significant data we would need to interpret what was presented." Warren Buffett, Chairman, Berkshire-Hathaway, Inc. 2000 Annual Report

Overall, one of the main ideas of EBR is that industries should come together to agree clear, comparable definitions of industry-wide metrics, and individual companies should define more specific value drivers and describe how they can be measured. Then publish those results, in timeframes that make sense, using XBRL. The market gets clear, unambiguous messages about what management is driving towards over the long term and sees how it is measuring itself.

The EBR consortium hasn’t really taken off at this stage. The accounting industry has been a bit preoccupied with the present, rather than defining the future, and in any event, the leadership should probably really come from Corporates rather than their advisers and auditors. But it’s a worthwhile goal. The process of getting a taxonomy together for these types of disclosures is something that individual companies, or entire communities, can collaborate on, whether or not they wrap it up in consortium tape.

The specific problem of a new product not fitting into a well-defined existing segment is something that XBRL handles really well by the way (it reflects accounting 😉 ) — you can disclose metrics split out across multiple segment hierarchies. So disclose information using the "old" splits, and, if it helps improve the way that performance is described, also disclose using a new set of breakdowns that better reflect the way the market is changing. If you want you can even use the new dimensions capabilities of XBRL to neatly constrain these splits.

By the way – Tim Bray gave a great talk about standards adoption (and, yes, provided another hint to us to keep things simple) at a conference run by XBRL-US in January.

Sun participating in the VFP is a natural next step.
With disclosures in 11 languages, if you like!

Three Cheers! SEC puts its money where its mouth is

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.

Round the XBRL world in 80 minutes

Something like 300 senior people from corporations all over America (and much further afield) attended the Business Wire XBRL webinar yesterday. Updated: A podcast of the presentations is now available. The slides are [no longer available]. We covered interactive data from all points — inside the corporation, from the investor’s standpoint, the regulator’s standpoint, the view from Wall Street (Morgan Stanley are right at the forefront of this topic) and WIFM… WhatsInItForMe, from the perspective of the corporate controller, IRO or CFO.

Mike Willis is still thinking faster than just about everyone else on the subject of business reporting. His slide on the effects of standardisation in all walks of life is really compelling. I also like the way he splits the various defining features of XBRL into "Standardisation" and "Validation". Can I steal that slide Mike? He also hinted at linking XBRL concepts to the control framework, an idea that David vun Kannon, who now works at PwC with Mike, has spoken about in the past. Potentially this is an incredibly powerful mechanism to highlight control deficiencies, and will obviously be of interest to the Audit firm’s (non-audit) clients.

Corey Booth mentioned that the SEC will make some announcements about the next stages of its Interactive Data agenda in the next couple of weeks. I’m guessing that they will announce the way that they intend to allow investors to do financial analysis of XBRL instance documents directly from the SEC site. I don’t suppose that the guys at Yahoo Finance are shaking in their shoes just yet. But it will probably come as a wake-up call. In an XBRL world you need to add real value to data, or forget about being an infomediary.

Thanks to all the speakers for agreeing to be part of it, and to Business Wire, our hosts.

Did you like the webinar? Let us know.

XBRL Webinar Today

Don’t miss today’s Business Wire XBRL webinar, sponsored by Thomson Financial. 2pm EST, with speakers Mike Willis from PricewaterhouseCoopers, Corey Booth from the SEC and Mark Schnitzer from Morgan Stanley. Oh. And yours truly.

Should be fun. We are aiming to point out why companies should get excited about the new IR capabilities that interactive data represents. By looking ahead, companies that start to incorporate XBRL into their disclosure strategy today will quickly reap the benefits. See you there. Register Here!