SEC Alert: Use of XBRL in Financial Statements

SEC Alert: Use of XBRL in Financial Statements

27/06/2008SRK Law OfficesComments Offon SEC Alert: Use of XBRL in Financial Statements

The Securities and Exchange Commission (SEC) has taken another step towards integrating new technologies into corporate financial reports. On May 14, 2008, the SEC voted unanimously to formally propose a new rule that will eventually require all U.S. companies to provide financial information using interactive data through use of XBRL, or eXtensible Business Reporting Language. By mandating the use of this new technology, the SEC is adopting a more dynamic presentation of financial information, one that will deliver important information to investors in a faster and more user-friendly format.

Interactive Data

The SEC’s interactive data initiative is designed to make financial information more accessible, more understandable, and more useful to investors by requiring public companies and mutual funds to submit information in a standardized, tagged format to facilitate analysis and comparisons. The interactive data is encoded in a format known as XBRL, which allows companies to map their financial information to a set of computer codes that represent U.S. GAAP accounting standards.

Today, investors who seek specific information directly from the source must often manually search lengthy corporate annual reports or lengthy mutual fund documents. Even if these documents are online, they are often digital blobs with limited search capability. Meanwhile, companies use thousands of spreadsheets and spend untold hours manually converting information from their internal systems into government-prescribed formats.

Interactive data pinpoints the facts and figures trapped in today’s often lengthy disclosure documents, allowing investors and analysts, with the help of software tools, to locate exactly the information they want, and compare it to the results of other companies, performance in past years, industry averages, etc. Simply put, XBRL transforms static financial data into dynamic analytical data.

How Does It Work?

Interactive data allows the creation of documents that are machine-readable, enabling computers to quickly extract the desired data. Every fact in an annual report, every number in a company’s financial statements, may be identified with a unique barcode that tells standard software what the item represents and how it relates to other items in the report. Interactive data tags all of the key facts in these large documents, so that software can instantaneously recognize and highlight them for the investor. It allows an investor to immediately access the information he wants, and instantly work with it.

With XBRL, investors can create their own customized reports, automatically generating financial ratios, graphs, and charts depicting important information from financial statements. Information including earnings, expenses, cash flows, assets, and liabilities can be analyzed and compared across competing public companies. Moreover, interactive data software can take much of the work out of manipulating financial data by eliminating cumbersome tasks such as copying and pasting rows of revenues and expenses into a spreadsheet.

Proposed Rule

The new rule proposed by the SEC would require companies to provide financial information in XBRL format according to a phase-in schedule. The SEC’s proposed schedule would require companies whose market capitalization exceeds $5 billion (approximately the 500 largest companies) to use the XBRL format for fiscal periods ending in late 2008. The remaining companies using U.S. GAAP would provide this disclosure over the following two years.

The required tagged disclosures would include companies’ primary financial statements, notes, and financial statement schedules. Initially, companies would tag notes and schedules as blocks of text, and a year later, they would provide tags for the details within the notes and schedules.

In the words of Corey Booth, SEC Chief Information Officer, the use of XBRL “will usher in a quantum leap in helping companies explain their business to investors.”

Other Developments – XBRL Viewers

In February 2008, the SEC announced the launch of the “Financial Explorer” on the SEC Web site to help investors quickly and easily analyze the financial results of public companies that have been filed in XBRL. Financial Explorer paints the picture of corporate financial performance with diagrams and charts, using financial information provided to the SEC as interactive data.

In addition to Financial Explorer, the SEC currently offers investors two other online viewers – the Executive Compensation viewer and the Interactive Financial Report viewer. The Executive Compensation viewer enables investors to instantly compare what 500 of the largest U.S. companies are paying their top executives. The Interactive Financial Report viewer also helps investors gather, analyze, and compare key financial disclosures filed voluntarily by public companies using XBRL.

By Steve Kronengold and David C. Zuckerbrot. © June 2008. All rights reserved
This article is provided for educational, informational and non-commercial purposes only. The content of this article is not intended to provide legal advice on any subject matter and should not be relied on as such.

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