Cox’s September XBRL announcement most significant ever
Despite all the well-documented benefits of XBRL, its development has been excruciatingly slow with some people so weary of hearing about the technology that they are unable to take its imminent adoption seriously. ‘I go to a lot of conferences where XBRL is brought up, and SEC staff often jokingly say they’ll get fired if they don’t mention XBRL a certain number of times per appearance; they’re always trying to talk it up,’ quips Douglas Chia, senior counsel and assistant corporate secretary at Johnson & Johnson.
Additionally the technology suffers from misunderstandings about what it involves. ‘Asking: Do you want XBRL? is like asking ten years ago: Do you want html? People have no idea what it is or what it means,’ says Mike Willis, a partner at PwC and the founding chairman of XBRL International.
Supporters of XBRL emphasize the upsides including speed and timeliness, standardization of compliance processes, interactivity and accuracy. The SEC currently estimates that almost 10 percent of public companies had to restate prior financial reports due to the discovery of errors in those reports. Something they argue, widespread XBRL implementation would help remedy. The biggest benefit of the technology, according to its supporters, is improved ability for analysts and shareholders to access, search and compare financial data of companies they are interested in. This, in theory, should lead to a better understanding of financial data and how companies compare to selected peers and the market as a whole.
Some of the biggest market players among the companies already signed up to the SEC’s voluntary filing program include Pfizer, Lehman Brothers and General Electric. SEC chairman Christopher Cox boasted recently that the combined market cap of signatories to the voluntary filing program now exceeds $12 trillion. But as yet only 50 or so US companies have signed up to the program, a figure some believe the commission would like to see considerably higher. This compares to the 800 companies that are currently using XBRL for all quarterly and annual reports in China. ‘I don’t think that the SEC is happy with the number of firms signed up so far,’ comments Bob Schneider, a partner in Nihon Equity Research.
Preaching to the unconverted
So what are the reasons for the low uptake on the program? There are multiple explanations including cost, inertia and a reluctance for many corporates to really engage with the concept. XBRL does not lend itself to catchy headlines, and the reporting language’s related jargon – taxonomies, data tags and so on – do not exactly make for gripping reading.
But things could be on the turn as universal implementation is inching ever closer and Cox is keen to get more people interested in XBRL. The rhetoric he used at his landmark announcement on September 25 was almost presidential in tone. ‘It’s difficult to overstate to significance of this achievement,’ Cox enthused. ‘Today’s achievement represents the removal of the last major obstacle that stood between investors and interactive data reporting,’ he added.
So what grand achievement was he referring to? The SEC has finalized a set of 60 interactive data tags that are to be used with XBRL. These tags were created in conjunction with the new US GAAP taxonomies. Cox believes the completion of the project will make the technology more appealing to companies and more useful to the investment community.
Almost aware of the possibility of losing the attention of his audience, Cox kicked off by assuring waiting journalists that he would not mention the ‘T’ (taxonomy) word. Amusingly, Cox actually found himself mentioning the word several times in his speech largely because the significance of his announcement hinges on the development of the new US GAAP taxonomies, a process that was completed shortly before his speech.
‘The new taxonomies will now cover more industry sectors and are more granular, complete and encompassing,’ notes Willis. ‘In other words, not just the financial statement tables but all the notes as well.’
Costing the benefits
A key benefit from the increased number of industries is a potential reduction in the cost of adoption as more companies won’t have to develop industry-specific data tags. According to Willis, the previous US GAAP taxonomies covered only five industry sectors and included roughly 5,000 disclosure concepts. ‘The new US GAAP taxonomies are for 13 industry sectors and they are more comprehensive in their coverage of disclosure items including around 15,000 disclosure concepts,’ he explains.
‘It was clearly the most significant announcement in the US ever as far as XBRL is concerned and it’s already having repercussions throughout the world,’ notes Sunir Kapoor president and CEO of UBmatrix.
Some also viewed Cox’s speech as signaling that XBRL will become mandatory within the year. He said he had asked his staff at the SEC main divisions and offices to recommend whether the use of XBRL should be mandatory for all corporate disclosures by spring 2008. And showing further evidence of the commission’s intent, the SEC created a new office within weeks of the announcement called the office of interactive disclosure given the sole aim of helping companies to modernize their financial disclosures.
‘The announcement was particularly important because he laid out a mandatory model,’ Kapoor says. Willis agrees, he thinks XBRL will be made mandatory toward the end of 2008. ‘This announcement by Chris Cox was key. He clearly outlined a roadmap for mandatory rule making whereby the SEC will issue a draft conceptual rule in the spring and a rule in the fall of 2008,’ he predicts.
But not everyone felt that the commissioner spelled out his mandatory message clearly enough. ‘We knew the announcement was a significant development for XBRL itself, but I think until people believe they’re going to make this mandatory immediately, people won’t really be paying that much attention to it,’ asserts Chia.
And it wasn’t just corporate secretaries who expressed doubt that XBRL will soon become mandatory; journalists also seemed to think the commissioner hadn’t spelled the message out clearly enough. ‘Reuters and AP concluded that it may or may not become mandatory,’ says Schneider. ‘But my feeling watching the webcast was: this is going to happen.’
One other indicator that the SEC is serious is the amount of money they have spent on getting the project ready. In the past year the commission sunk $48 million into its Edgar reporting service in an effort to make it XBRL-ready. For a group that regularly bemoans its lack of funding, this is a significant expenditure.
Global impact
The message seems to have been received in other parts of the world, however, with governments around the globe sitting up and taking notice. Since Cox’s speech, the Australian government has launched a AUD 200 million project to require all business reporting to be in XBRL format by the beginning of 2010.
The momentum definitely appears to be picking up and it could be argued that many companies would benefit from taking a more proactive approach: ‘If I were a CFO I would start looking at joining the voluntary program and working out what the issues are for my particular organization,’ Schneider asserts.
The big accountancy firms have also thrown their weight behind XBRL. ‘After Cox’s announcement, the American Institute of Certified Public Accountants (AICPA) reinforced that they are due to use XBRL quite broadly in the US for financial reporting,’ says Kapoor.
But despite the enthusiasm of XBRL supporters, there remains a sit-back-and-wait approach among most US corporates. ‘No one really wants to be a guinea pig,’ says Chia. ‘I think people know it’s inevitable that it’s going to happen but until the dust settles and the SEC really figure out exactly how they want this to look, it’s not worth trying to put the effort into it.’
There are obvious issues relating to cost and corporates are fearful of paying out large sums to become compliant only to find that later the goal posts get moved. ‘At the end of the day it might end up looking different, so what’s the point in becoming an expert now?’ Chia adds.
Costs stir uncertainty
Although the commission stresses that becoming XBRL compliant need not cost the earth, the quotes coming in from consultants are doing little to reassure the market. ‘Certainly there are a lot of people who are willing to charge a lot of money to make the transition,’ says Chia. Additionally, companies bruised by the impact of Sarbanes-Oxley are reluctant to throw their weight behind something that could hinder their short-term competitiveness in the way that Sox did. ‘It does seem the government often has a habit of making changes without knowing how much it’s going to cost people,’ notes Chia.
But the problem is that if companies wait until it becomes mandatory before trying out the technology, they will leave themselves less time to adjust to the new reporting processes, some of which will undoubtedly require refining during the initial phase.
‘Obviously Cox wants XBRL to be his legacy so we all know it will happen before he leaves office and Cox has already stated publicly that once the Bush administration leaves, he leaves, so we know it will happen soon,’ Chia says. And if it becomes mandatory, people will shift their attention to it but right now, there’s a lot of other stuff at the top of everyone’s agenda, so if it’s not mandatory then it’s not so important to get involved,’ he adds.
The pro-XBRL lobby maintains that there are wider considerations than Christopher Cox’s legacy. ‘I’m still not sure if a lot of people get it, this isn’t a whim of Cox’s, it’s not just his little hobby horse, it’s a truly international movement,’ Schneider asserts. Other XBRL supporters think companies should be looking at the bigger picture. ‘Around one to two percent of the GDP of the G8 countries is the cost of regulatory reporting. The numbers we are talking about in terms of savings are huge,’ Kapoor says.
Competitive advantage
As well as helping companies with their external communications, advocates of XBRL also stress its possible application for internal reporting and compliance. ‘Most companies that are signed up to the voluntary filing program are not using XBRL for their internal reporting but I would think that all departments would benefit from more timely and higher quality information being available for decision and analysis,’ argues Willis.
And he is not alone in that belief. ‘One speech that I found particularly compelling was that this whole idea of compliance in the US is so complicated and there are so many different rules that XBRL is increasingly being seen as a way for companies to deal with this compliance issue of being able to organize information throughout the company,’ says Schneider. Although a way off for many companies, he thinks corporate secretaries would be among the professionals to benefit from the use of XBRL for internal reporting and compliance.
All in all, Cox’s announcement has demonstrated that XBRL is picking up steam in the US. The developments of the new taxonomies mean that more companies can now file in XBRL format without incurring so much extra cost. Additionally, if XBRL is indeed intended to be a key part of Cox’s legacy then 2008 is going to see some huge developments in the path toward implementation. For the majority of corporates then, it really would pay to get up to speed as quickly as possible.
