XBRL: a 'revolution' in corporate reporting? Touted by the SEC chairman as the next revolution in corporate reporting, FERF spoke with three early-adopter companies to find out why they favor this new format.

Christopher Cox, the newly minted chairman of the U.S. Securities and Exchange Commission (SEC), is on a mission to improve financial reporting. "We really are on the threshold of a revolution in corporate reporting," he has said. During his tenure, he intends to "bring our system of corporate disclosure and financial reporting into the 21st century."

He presented his vision for interactive data in a videotaped speech for the 12th XBRL International Conference, held in Tokyo on Nov. 7, 2005: "Interactive data could make it possible for issuers to reduce the cost of substantiating the numbers that appear in their financial statements. It would assist regulators in maintaining the integrity of the markets. Interactive data would also make disclosures more useful to investors, and to every market participant," said Cox.

Will Cox's vision evolve into reality, or is it merely a "revolution" of a small group of pioneers?

One means to provide the interactive data Cox speaks of is by using XBRL (eXtensible Business Reporting Language), a language for the electronic communication of business and financial data. XBRL is not a technology, but a set of standards, called taxonomies, which are built using the Extensible Markup Language (XML).

XBRL is being developed by an international non-profit consortium of approximately 350 major companies, organizations and government agencies. It is an open standard that is free of license fees.

Last February, the SEC had announced an XBRL Voluntary Filing Program (VFP). Its primary purpose, the SEC said then, is to "assess XBRL technology, including both the ability of registrants to tag their financial information using XBRL and the benefits for using tagged data for analysis."

But as of Dec. 1, 2005, only nine companies were participating in the VFP (see box on next page). Financial Executives Research Foundation (FERF) spoke with financial executives at three of the nine companies: EDGAR Online Inc., Microsoft Corp. and United Technologies Corp.

EDGAR Online Inc.

EDGAR Online's Chief Operating Officer and CFO Greg Adams says his company has been an active and enthusiastic proponent of XBRL since the founding of the XBRL consortium. "Participation in the VFP was simply an extension of our commitment to fostering the adoption of XBRL and our belief that it will lead to more transparent company reporting," says Adams.

Back in 1984, when the current Electronic Data Gathering, Analysis and Retrieval System (EDGAR) was adopted by the SEC, a voluntary pilot program was also established. "The EDGAR system has been the backbone of the SEC's disclosure program," says Adams. The SEC began accepting some SEC filings in electronic format in January of 1994, and since that time, the number of filing types that can be submitted electronically has grown exponentially, as has the daily volume. However, Adams says, "Unfortunately, the underlying technology of the EDGAR system has not kept pace with advances in information technology (IT)."

What XBRL will do, he adds, is enhance the EDGAR system. "XBRL submissions will provide additional transparency to the financial disclosures of U.S. public companies. The standardization of the financial statements in XBRL taxonomies will also facilitate analysis by all users of the EDGAR system, thereby increasing reliance on EDGAR," says Adams.

EDGAR Online provides financial information (including EDGAR filings and XBRL financial statements) and a variety of analysis tools via online subscriptions and licensing agreements to professionals in financial institutions, corporations and accounting firms.

EDGAR Online's initial VFP effort of about 160 hours included tagging more than 200 items. However, Adams says, "Because EDGAR Online has built a conversion tool and has extensive experience in industry taxonomies, the conversion of our own financial statements took relatively little time and effort."

Besides its own, Adams comments that EDGAR Online has already converted to XBRL financial statements of all the companies in its database to include current financial statements as well as the last seven years and 28 quarters. These financials are available through I-Metrix, a recently-introduced subscription service.

"We have taken a leadership position by converting the financial statements of all U.S. public companies to XBRL, and we are now working closely with the consortium on the development of industry-specific taxonomies," says Adams.

Microsoft Corp.

Microsoft was the first company to furnish full financials and footnotes tagged in XBRL. Scott Di Valerio, corporate vice president, finance and administration and chief accounting officer (CAO), says of Microsoft's initial effort: "The first time we converted our Form 10-Q the effort required about 175 hours--75 hours for XBRL taxonomy extension and customization, 60 hours to create and validate the XBRL document and 40 hours for quality assurance review." He notes the process was the joint effort of three individuals: an accountant; an XBRL technologist to extend the taxonomy and assist with technical validation; and an external reporting team member to provide quality assurance.

However, Di Valerio adds, "The second time we tagged our 10-Q, we reduced the time by two-thirds, to 60 hours."

In September 2005, Microsoft became the first company to submit its annual Form 10-K report (for the year ending June 30, 2005) to the SEC in XBRL format. "Because of the number of disclosures and the length of the annual report, tagging our Form 10-K required additional time," explains Di Valerio. He says that Microsoft learned a number of important lessons during its efforts to render XBRL documents. Those include:

* Tagging data is a new task, and companies will need guidance on best practices. For example, companies will need to learn how to optimize "context," an XBRL concept that represents time periods, business segments and reporting scenarios. Context represents one-third of the XML in the 10-Q.

* Financial statement preparers need software tools for rendering XBRL documents. There are tools available, but these tools are early in their product cycle, and still need enhancements to enable ease of use for tagging and extending standard taxonomies.

* XBRL taxonomy extensions and validation processes present a new and complex technology to preparers.

So, how does Di Valerio regard the XBRL efforts, and have they been worthwhile? He says that when he meets with the finance leadership of customers and other companies, he is "struck by the similarity of the business challenges we face. We are all trying to improve our financial reporting processes, from closing the books to getting information back to management in a timely manner, so that we can make better decisions." He regards XBRL as another way that technology can enable automation and efficiency, and strengthen internal controls. "We are an active supporter of XBRL because we recognize its potential to help solve common business issues. We do envision the use of XBRL for internal reporting, and we are evaluating scenarios in which XBRL could help automate our processes."

United Technologies Corp.

United Technologies decided to participate in the SEC's Voluntary Filing Program, believing that it is only a matter of time before XBRL will be required. "Participation in the voluntary program was a great way to get introduced to the technology and begin to learn and understand the tools, the mechanics of tagging and special filing considerations," says John Stantial, director of financial reporting for United Technologies.

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Stantial concedes that there is an initial learning curve for some of the unique terminology and requirements of XBRL, but says, "for the most part, the tagging is a fairly expeditious process after you become familiarized with the mechanics." He comments that the level of work also depends on whether the intent is to tag the basic financial data or also tag footnotes and Management's Discussion and Analysis (MD & A). In addition, another level of modification to the standard taxonomies may be required, based on the specifics of a company's financial statements.

For United Technologies, Stantial and one of his managers were able to render the XBRL documents themselves, with minimal outside help. The three filings to date, and the Form 10-Q he is currently working on, have taken approximately 400 hours.

"The initial filing took a disproportionate amount of time as we familiarized ourselves with the tagging software, the tagging process and filing issues," he says, adding that "subsequent filings have gone much more expeditiously. Periodic questions will arise on extensions, taxonomies, or some other aspect, for which we may consult outside expertise."

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Stantial advises other financial executives who are considering VFP to use this current voluntary period advantageously to become acclimated to the tagging software tools available and the mechanics of the tagging and filing processes. He says he believes that "XBRL will become the standard before too long, given all that it has to offer, so the earlier companies can get up to speed and work out their issues, the better off they will be."

So, What's the Problem?

If XBRL is the latest and greatest, why aren't more companies voluntary filers, and if they're not now, when will they join this group? "In the early stages of any new technology, there are early adopters, who tend to be technologically savvy," explains Microsoft's Di Valerio. "Others are satisfied to use existing technology until the new technology is more widely accepted and better tools are developed." But, he argues, "It is up to the early adopters, such as Microsoft, to provide leadership and pave the way for the others."

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Also, SEC Chairman Cox seems optimistic and not concerned with the slow pace of adoption. "The reason that everyone is not doing their financial reporting using interactive data is simple: it's a new concept. People will use it when they discover how much time and money it can save them, by automating and speeding up the process." Indeed, he says the SEC wants it because it will make financial reports much more useful.

"Companies will want interactive data for the same reason. The truth is, it's inevitable--and if the 21st century has shown us anything thus far, it's that technological change occurs extremely quickly."

Cox continues: "It's not surprising that we're hearing from both filing agents and accounting firms that their clients are suddenly showing greater interest in interactive data. Given its enormous potential, there's no doubt this increased interest in interactive data will soon translate into widespread adoption."

William M. Sinnett ([e-mail]) is Director of Research at Financial Executives Research Foundation (FERF).

RELATED ARTICLE: Filers in the SEC Voluntary Filing Program, as of Dec. 1, 2005

Adobe Systems Inc.

Bowne & Co. Inc.

Business Objects S.A.

RR Donnelley & Sons Co.

EDGAR Online Inc.

EMC Corp.

InfoSys Technologies LTD 

Microsoft Corp.

United Technologies Corp.

RELATED ARTICLE: takeaways

* SEC Chairman Cox says we are on the threshold of a revolution in corporate reporting, and during his tenure, he intends to bring the system into the 21st century.

* The SEC announced an XBRL Voluntary Filing Program (VFP) last February. As of December 1, nine companies were in the program.

* XBRL is being developed by an international consortium of approximately 350 major companies, organizations and government agencies.

* XBRL enhances the EDGAR reporting system by providing additional transparency. It will also facilitate analysis by users of EDGAR.