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!

FFIEC project starts in October…

This is a reprint of my September column in the Business Wire newsletter, but, given the importance of this project, I thought it bears repeating!

At a recent meeting of XBRL-US, the covers started to come off the long awaited “Call Report Modernisation Project”, a ground breaking XBRL project that goes live on 1 October. Otherwise known as the FFIEC (Federal Financial Institutions Examinations Council) call report project, this is the first project in the world to mandate the use of XBRL for regulatory reporting. The FFIEC is a co-ordinating body for the US bank regulatory agencies. It’s going to mean better information gets into the hands of the market, and regulators, much faster.

The FFIEC call report project upgrades the ageing quarterly reporting process required of the 8000+ US banks. The main benefits that the FFIEC are seeking are to improve the speed, efficiency and accuracy of their data collection, reducing the time that it takes to provide UBPRs (Uniform Bank Performance Reports) to bank supervisors working in the Fed System, the FDIC and the OCC. Many people in the markets are salivating at the thought that UBPR data will be published in around half the time previously achieved by these agencies.

By using XBRL taxonomies to define concepts, and an (admittedly semi-proprietary) formulae linkbase to define validation rules (or ‘edit checks’ in FFIEC speak), the project has pushed the task of providing accurate data back where it belongs – the supervised banks. Previously, error checks were carried out by staff within the regulators, with corrections and follow-up sought over the phone, slowing down the publication process by something like 60 days.

Clear thinking

By publishing their validation rules, the FFIEC continues to lead the bank regulatory world in transparency. This philosophy, of publishing requirements and publishing the individual responses of regulated institutions, is something that other prudential regulators around the world tend to look on as revolutionary. Many regulated organizations, outside the United States, have long considered the publication of their performance on a range of risk measures as commercially sensitive.

But consider the virtuous cycle that the systematic release of this kind of information into the public domain creates. It provides incentives for staff inside the regulators to carry out great analysis, as they don’t want to be caught out when an industry pundit calls out a problem. Most importantly, it provides great incentives for executives of regulated institutions to pay attention to risk-based performance measures, since their peers will be comparing results.

It provides a simple, market-based mechanism for regulators to force management to look beyond growth and profitability, and examine the sustainability of their performance, based on asset quality, liquidity and the efficiency of their capital allocation. Of course, this philosophy of market-based transparency has been adopted in the Basel II capital accord reforms so, as they start to be implemented, much of this information will start to become available for the first time.

The provision of XBRL data from bank to regulator, and insurer to regulator, provides clear benefits to regulators. Many regulated institutions ask “What’s in it for me?” The answer, as the FFIEC is showing, must include the publication of each supervised institution’s reports, in XBRL format, making analysis a process focussed entirely on creating new insights into business performance and comparison, instead of the manual collection and collation of data itself.

Crossing the chasm

Over on the Gilbane Report Blog, Bill Zoellick’s July 26 post about the FFIEC project is, as usual, insightful. Bill argues that this kind of very focussed application of XBRL is exactly the way that technologies move beyond the early adopter phase.

It seems unarguable that, with some of the largest regulators in the world now using XBRL for these kinds of “closed form” reporting arrangements, other agencies, looking to improve the accuracy, timeliness and relevance of their reports will follow suit. And the evidence, from around the world, is very much in tune with this.

At CoreFiling, this is exactly the way we look on the technology. Closed reporting solutions using XBRL are now mainstream, with several referenceable implementations and good support from a range of vendors. No regulator, bank, insurer or large corporate that has to collect large quantities of complex performance data should contemplate implementing systems that do not support the standard.

Voluntary Filing Program

Since April, the poster child of XBRL-US has been the SEC’s Voluntary Filing Program, boosted this month with the announcement that N-Q and N-CSR filings by mutual funds will be accepted in the new format. While the tools and techniques to support filing of full financial statements have not yet reached the level of maturity needed to make this simple, the benefits, in terms of reputation, visibility and messaging are clear. Generally, initial take up should be from leaders that understand these benefits, realising that production of XBRL materials will take some effort the first time around.

In fact, supporting those organizations that want to grasp that first-mover advantage is one reason that we have set up a specialist consulting group in New York, to assist registrants that seek to file their accounts in XBRL.

More on this next month… Stay tuned!