Bob Schneider is a Partner in 
Wilson So is the Director of Hitachi Consulting Corporation Four Steps to Prepare for an XBRL Mandate
Written by Daniel Roberts Posted on May 12, 2008
Daniel Roberts is the former Chairman, XBRL-US Steering Committee; he can be reached by email.
Normally regulators, including the SEC, find it difficult to claim cutting-edge status as technological innovators. However, the current Chairman, Christopher Cox, clearly showed his intentions as far back as November 2005, when he publicly stated his objective to bring financial reporting into the 21st century. As past chairman of the XBRL-US Steering Committee, I had the pleasure of watching the Chairman’s commitment to that goal take shape and become the now widely expected mandate for the adoption of XBRL for regulatory reporting to the SEC.
Recently a subcommittee of the Pozen Committee, a task force established by the SEC to address the issue of complexity in financial reporting, recommended that the Commission mandate the use of XBRL for reporting financial information. The new language is designed to make financial reporting clearer, more consistent for comparing “apples to apples and oranges to oranges,” and faster for the consumption of the information that today’s investors and regulators need in order to perform rapid and detailed analysis of public companies. In mandating the use of XBRL, the SEC follows other capital market and banking regulators, including those in China, Singapore, the Netherlands, and Spain, not to mention the United States. Other regulators are expected to follow, extending the spread and scope of information-centric reporting.
The widely anticipated (and previously postponed) release of a proposed Rule by the SEC on May 14 will show just how aggressive, or otherwise, the Commission will be in its initial requirements.
Historically, financial statements and associated reports have been “document-centric,” whether physically or electronically printed. Now, business leaders have a narrow window of opportunity to prepare themselves and their financial reporting infrastructure for the imminent conversion to an “information-centric” marketplace.
XBRL or interactive data is an international standard for “tagging” individual pieces of information within a full report, thus making it possible for a consumer of that information to select and import automatically only the information required by the user. Regulators will not be the only, or even the primary, benefactors of the change to information-centric reporting. Analysts, investors, lenders, managers and competitors will all benefit from the ability to select and import information the moment that information is released by a company. Gone will be the days of manual re-keying or inference-based data import engines. Also gone will be potential errors resulting from that process, as well as the need for significant information technology infrastructure to parse and process the information.
Following the recommendation of the Pozen Committee (and in particular Peter Wallison’s additional comments provided to the Committee), and based on progress to date, there is a widely held expectation that the Commission will require companies to provide 2008 year-end results as XBRL-tagged reports. How many companies and to what level of “tagging” will remain uncertain until we see the proposed Rule. But consensus seems to be that we should expect the “largest 1000” companies to be providing XBRL versions of their financial statements to the SEC in 2009.
The SEC has spent the past four years experimenting with XBRL through its Voluntary Filing Program and the Test Program, and through its support for the development of a comprehensive US GAAP taxonomy (i.e., the “dictionary” of business terms that can be used to “tag” financial reports as XBRL documents). In addition, the SEC’s reporting system is undergoing a complete rewrite. The SEC is also investing $49 million in a rewrite of the EDGAR system with acceptance of XBRL as one of the key elements.
What can the thousands of SEC reporting businesses do today to prepare themselves? There are four steps that a business can take today to ensure that the transition to XBRL is smooth and to position their business for taking advantage of this change:
1. Identify a project team to learn more about interactive data and experiment with the creation of XBRL versions of current reports.
2. Ask the primary business reporting software provider to brief appropriate personnel on how they will assist in making a smooth transition.
3. Ask the company’s auditor to brief appropriate personnel on how they will be incorporating the provision of assurance over XBRL reports into the audit process.
4. Brief company executives and Board of Directors on the impact, benefits, and timelines for the introduction of XBRL into business reporting processes.
When ultimately mandated by the SEC, the transition from document-centric to information-centric business reporting need not be resource-intensive, and it should not become another “SOX” event. All the evidence from participants in the voluntary and test programs to date seem to indicate that the costs are significantly lower than many fear. The steps above will ensure that the transition goes as smoothly as possible. Otherwise, as with any fundamental change, failure to plan and prepare will result in increased costs — both internal and external.