Written by Bob Schneider     Posted on January 22, 2008

In conjunction with its January 11 meeting, the Pozen Committee (as the SEC’s Advisory Committee on Improvements to Financial Reporting is commonly known) released its Draft Decision Memo. Despite the scary Reuters headline SEC Panel Warns XBRL Could Have Costs Like Sarb-Ox (which Christian Dreyer addressed in this post), the Committee has actually taken a very positive stance toward XBRL.

Indeed, much of this progress report reads like a publicity piece for interactive data, and readers who are often asked “Why XBRL will want to review pages 79 and 80 for the long list of answers”. Most notably, the report states:

The Committee believes that the SEC should eventually require all public reporting companies (preparing their financial statements using U.S. GAAP) to tag the financial statements (including footnotes) they are required to file with the SEC as part of their Exchange Act reports using XBRL. The Committee believes such a mandate is necessary in order to encourage the commitment of resources toward the necessary software development for tagging, viewing and reading of the XBRL tagged information, use of XBRL tagged data by users such as analysts and investors, and company use of XBRL tagging internally.

Although the word “eventually” in the first sentence does lack specificity, this statement demonstrates how far XBRL has come in that an SEC mandate — which was very much an open question just a few short months ago — now seems a fait accompli. (Financial Week has a good account of the Committee’s actions.)

The entire discussion on XBRL, beginning on page 75, is useful reading. I found two specific items of interest.

First, the report seems to downplay the use of company extensions. It states: Because the U.S. GAAP taxonomies currently out for public comment track U.S. GAAP, the Committee believes that there likely will be less need for customized extension elements. One of the purposes of the comment period is to identify additional tags or elements that should be added to the taxonomy, reducing the need for customized extensions.

Perhaps I’m reading more into these sentences than I should. Still, I find it interesting that, rather than expound on the benefits of customized extensions, the report instead explains how their use will likely diminish because of the introduction of GAAP taxonomies and the public vetting process now taking place.

Second, the authors don’t appear to see much of a future for data aggregators: Because manual input is eliminated, there will be reduced error rates in reporting and inputting of corporate data by aggregators. Because aggregators will not be necessary, companies will be able to maintain control over their numbers; what they report will be what goes into the models.

This forecast appears to conflict with that of the Bear Stearns group, which saw a continuing, if changed, role for aggregators.

The most notable action of the Committee at the January 11 meeting was to recommend that the SEC initially require 500 of the largest US companies to prepare XBRL statements. I can see why the biggest firms would be best able to undertake the task of preparing interactive data statements. On the other hand, smaller companies, who are eager to gain analyst coverage, will be important beneficiaries of XBRL implementation. It would seem having their experiences with XBRL known early on would be useful as well.

Written by Christian Dreyer     Posted on January 16, 2008

Christian Dreyer, CFA, is a past President of the Swiss CFA Society, a 1,700-member-strong association of finance professionals in Switzerland. He is Managing Partner of Tertium datur AG, an advisor specializing in pan-European pension funds. Previously he was CFO of an IT outsourcing firm and head of investment research at a Swiss state bank. He is on the IASB’s Strategic Advisory Council for XBRL.

Skepticism about XBRL seems to abound lately, although most of it is easily soothed. One issue stands out that may raise the hackles of preparers particularly: If XBRL were to have the same costs as Sarbanes-Oxley Section 404 implementation because of independent assurance, as one Reuters story suggests, that would be a big No-No indeed.

However, looking at the Committee’s draft memo (page 75 and after), such dramatic headlines need to be taken with a ton of salt. Substantive assurance costs (if any) are likely to arise only if the production of XBRL formatted data were implemented in the least competent way imaginable, i.e., by means of what might be described as a parallel XBRL track of accounting. To assume that this is the default practice would not exactly reflect high expectations with regards to the professional competence of finance departments.

One of the basic tenets of XBRL disclosure is that it is in fact disclosure neutral, i.e., the numbers displayed in an XBRL instance document are identical to what is reported on (electronic) paper. For as long as XBRL filing is not the exclusively permitted way of filing, assurance of disclosure neutrality probably satisfies the needs of most users of financial statements. In a reasonably well structured accounting & auditing cycle, such assurance should come cheaply.

Written by Bob Schneider Posted on January 11, 2008

A recent CFO.com article titled XBRL Skeptics Abound explores the arguments of XBRL detractors. Among its main themes is that interactive data, in the view of one accountant, is “a consulting product…a product in search of a market being pushed by the people who have an interest in pushing it.”

The introduction of important technologies usually produces both winners and losers. Those who stand to gain naturally tend to become proponents, and those who stand to lose become critics. But the argument that XBRL is primarily the handiwork of a consultancy conspiracy is not convincing. Here’s why:

(1) XBRL.org is a truly global consortium with jurisdictions that range from Canada and South Africa, to Austria and Israel. Some countries where interactive data has made substantial progress China, for example are certainly not those we associate with having large, organized consulting constituencies. The traction XBRL is gaining in so many countries in areas extending from financial reporting to microfinance to sustainability reporting belies the notion of interactive data being merely a creature of powerful consulting interests.

(2) Among XBRL’s supporters are certainly organizations and companies that will benefit monetarily from adoption. But its proponents also include important entities — the IASB, the CFA Institute, the accounting group at Bear Stearns whose voices wouldn’t seem to be modulated by a profit incentive. By the same token, certainly some of the participants in the SEC’s VFP have been companies that stand to gain from interactive data adoption. But VFP filers also include strong backers like United Technologies whose product lines wouldn’t seem to derive any benefit from XBRL adoption.

(3) Consultants are especially enamored of innovations that produce strong, continuing revenue streams for their services. But the evidence thus far indicates that an XBRL mandate would not fit that description. At the SEC’s XBRL roundtable last June, most VFP participants reported moderate initial investments, sharp learning curves, and small incremental costs. Other observers think these expenses may yet prove substantial. Still, at this point an XBRL mandate wouldn’t seem like a particularly lucrative development for the consulting industry.

(4) The argument of “it’s only the consultants who want this thing” is especially powerful when the benefits of a new law, technology, etc. will be delivered to just a small group of recipients. But even if we limit the discussion of XBRL to financial reporting alone (i.e, just XBRL-FR and not XBRL-GL), interactive data addresses the real needs of a wide range of users.

Financial regulators want to become more productive to meet mandates for more frequent analytical reviews of company statements. With the downsizing of equity research budgets, securities analysts are under pressure to follow more companies at reduced cost. Similarly, smaller public companies that are not receiving coverage want to find new, more economical ways to make their investment case to the financial community. And the additional transparency that XBRL offers all investors is now widely perceived as an important societal goal. Interactive data is not a magic potion for all the problems of these users. But it does have substantial potential for numerous beneficiaries.

(5) XBRL is merely one small element of a much greater movement toward enhanced information management. The exponential expansion of data, coupled with the demands on organizations to organize that data for both internal and external needs, compels entities to explore new ways to structure information. This pursuit often entails metadata and XML solutions. In the financial world, XBRL is just one of several XML languages being developed. The impetus toward adopting metadata solutions for information management derives from forces far more powerful than the consulting industry alone.

In short, I think the question of whether XBRL implementation is being primarily driven by the consulting industry is completely legitimate. But it’s clear to me that the answer is No.

Written by Bob Schneider Posted on January 5, 2008

The SEC launched its long-awaited Executive Pay Reader just before the holidays, and it is receiving strong press coverage, almost all of it positive. After working with the tool a bit, I agree with Gary Purnhagen’s forecast last spring that the Reader is likely to be “a brilliant publicity move for XBRL.”

There is a tremendous amount to like about the Reader. Investors will be impressed by the tool’s ability to quickly retrieve pay data for top executives of the 500 firms covered in the database. I like the quick links to company proxy statements (which contain the detailed comp data) for more exhaustive analysis. Ascending and descending sorts are speedily applied on any field in the dataset. As Gary predicted, it’s likely that many users, realizing how cool interactive data can be, will become firm supporters of adopting XBRL for companies’ quarterly and annual filings.

Here are some tips for getting better use out of the Reader:

(1) Using the tool is a two-step process. First, search for the companies you want. Second, click Display Compensation Data to retrieve the pay info, which appears on the Summary of Executive Compensation page. Don’t worry if you left a company out in your initial search — the Reader allows you to add comp data for other firms to the pay records you’ve retrieved.

(2) Use the Ticker Symbol or Company field to search for specific companies one at a time. You can continue to search and add companies one by one to your results.

(3) As you’re likely aware, when you filter in any form with two or more fields, your criteria can work together as AND criteria (i.e., all conditions must be true to have a match) or OR criteria (any condition may be true to have a match). The Reader’s form uses AND criteria. For example, suppose you (1) open the Public Market Capitalization dropdown and choose $9.4 billion and up; (2) open the Revenue dropdown and choose $5.5 billion and up; (3) click Search. The Reader will retrieve only companies which have a market cap of at least $9.4 billion and, at the same time, have revenues of at least $5.5 billion.

If you want to use OR criteria instead, just search for each condition separately. In the example above, open the Public Market Capitalization dropdown, choose $9.4 billion and up, and click Search. Next, open the Revenue dropdown, choose $5.5 billion and up, and click Search. The Reader will retrieve records for all companies with market caps of at least $9.4 billion, as well as any additional companies that don’t have market caps of at least $9.4 billion but do generate revenue of at least $5.5 billion.

(4) Because the tool uses AND criteria, don’t try to search for a specific company and those in a specific industry at the same time. For example, suppose you want to check out compensation data for technology companies, and you want to make sure any particular name say, General Electric — is also included in the company records. You might be tempted to (1) enter General Electric in the Ticker Symbol or Company field (the Reader will display GE General Electric, which you can choose); (2) open the dropdown list for the Industry field and choose Technology; (3) click Search.

This search will return no records, however, because GE is classified in the database as an Electronics company, not a Technology company. In other words, because there are no values where both conditions “-” the company is General Electric and the industry is Technology — are true, no company records are retrieved for this filter.

But again, as with other OR searches, there is an easy workaround: First search for General Electric, then search for Technology companies.

(5) A cool feature on the Summary of Executive Compensation page is a filter for “executive types.” You can screen for CEO’s, CFOs, and all other officers.

One concern I still have is how individual investors may use the compensation data. In my post some months ago I wrote:

“I recognize that no one is telling investors to use executive compensation to the exclusion of all other factors in making investment decisions. But comparing compensation to company and stock performance under a particular management team is a complicated and difficult task, given the trade-offs between achieving long-term company objectives and short-term stock price movements. Institutions and other sophisticated investors have the smarts to use (or ignore) compensation data as they see fit; but I fear some small investors could be lured into making simplistic judgments based on executives total compensation levels.”

Broc Romanek at TheCorporateCounsel.Net echoes these sentiments: “I worry about investors and analysts looking at numbers without the benefits of footnotes, CD&A and other narrative that puts the numbers in contexts.”

Frankly, though, I think the overall goal of demonstrating to investors the potential of interactive data outweighs these concerns. Longer term, XBRL implementations and tools will make deep, wide-ranging, comprehensive investment analysis that much easier to accomplish. Most investors will welcome the Reader and the information it supplies. Practical demonstrations of the uses of XBRL are a valuable means for building support for interactive data, and the Executive Pay Reader is an excellent realization of that effort.