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SEC To Require Mandatory XBRL Submissions

Expert Witness: Fulcrum Inquiry
Starting with this calendar year, the largest public companies will have to tag their financial statements with computer code that facilitates compilation and comparison of reported data. Starting next year, all “accelerated filers” will have such reporting. We explain the background, importance, and cost of this financial reporting.

In mid May, the Securities and Exchange Commission (SEC) voted to propose that companies begin filing financial statements in an interactive tagged format as early as next year. There is a 60-day comment period, but the proposal will almost certainly be adopted.

Implementation will be phased, with larger companies being required to adopt the reporting first, as follows:

1. Companies whose public stock is worth over $5 billion (around 500 companies) will begin for fiscal periods ending after December 15, 2008 (i.e., the calendar year we are already in).

2. Companies with a public stock worth over $75 million would need to file a year later. The second year companies are the so-called “accelerated filers”, which total around 1700 additional companies not addressed in the first group of 500 companies. At this point, all public companies of interest to the vast majority of investors will be covered.

3. By the third year (meaning staring in 2011) all public companies would be subject to the same interactive reporting requirements.

In their first year of filing, companies will be required to file annual and quarterly financial statements tagged in XBRL, with footnotes and schedules that are “block tagged”. This means that each footnote will have a single tag. In their second year of being covered by the requirements, companies must tag the footnotes and schedules in detail.

The SEC estimates a $30,000 cost to prepare an initial XBRL filing with block-tagged notes and schedules. The cost of preparing deep-tagged footnotes and schedules in the second year is not known, but will likely be double or triple the cost of tagging just the major financial statements. Costs will drop dramatically (in the range of 75 to 90%) for subsequent filings once the templates and processes are established.

An XBRL primer for non-finance professionals

XBRL stands for “eXtensible Business Reporting Language”. XBRL is a technology and related taxonomy/dictionary for preparing, transmitting and analyzing financial information. XBRL brings context to numbers by tagging financial data, effectively standardizing the information. The information is automatically placed in proper categories through the advance coding of the data according to the taxonomy. This means data transmitted through XBRL (i) is immediately usable without re-keying, and (ii) can be automatically put into a structure that allows comparison of information between periods and firms. Any time financial data is exchanged, particularly over the internet, XBRL can improve the process.

Regulators, investors, and companies consolidating diverse financial information have an interest in promoting XBRL because of (i) cost savings, and (ii) improvement in understanding and analyzing the data. Rather than sorting through a lengthy document, information transmitted through XBRL will be immediately available in an electronic form from which it can be compared to other registrants, subsidiaries, industry information, etc.

In the United States, XBRL implementation has been slower than in Europe because of (i) challenges in obtaining agreement on data reporting definitions, and (ii) slower acceptance by regulators, particularly the SEC.

XBRL is a royalty free and open technology. It is not dependant on proprietary software, so information can be easily shared across hardware and software platforms. Most software vendors are including XBRL capabilities into their products.

How will this affect investors?

Of course, XBRL files are useful for screening companies and performing comparisons, but only if historical data is available in the same form. As with any new implementation, the usefulness will increase once additional data is available in the new format. This will take years, since there is no requirement to tag data for periods before the implementation dates.

Public markets respond quickly to news. Since there is no requirement for earnings releases to be tagged in XBRL, investors won’t be getting the most widely followed (and timely) company disclosures in XBRL.

Nevertheless, analysis having a longer-term focus will benefit from the data automation. Corporate data vendors will save significant labor costs since the data from SEC filings will not need to be re-input into their reporting services. Eventually, these cost savings will likely be passed down to customers due to normal competitive pressures.

Mr. Nolte has 30 years experience in financial and economic consulting. He has served as an expert witness in over 100 trials. He has also regularly served as an arbitrator. Mr. Nolte has achieved the following credentials, CPA, MBA, CMA and ASA.

Copyright Fulcrum Inquiry

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.

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