SEC Will Require All Companies To Report in XBRL

By Dominic Jones

THE U.S. Securities and Exchange Commission is converting its EDGAR database to use Extensible Business Reporting Language (XBRL), paving the way for mandatory filings in the new interactive financial tagging format.

The SEC has awarded three contracts totaling $54 million to transform the agency’s public company disclosure system over the next three years, a major commitment that indicates that the SEC has no intention of backing away from XBRL and ultimately will have no choice but to mandate the format.

While the project timeline is three years, key milestones will be completed in the next 12 months, including creating XBRL tags for US accounting principles and developing free open source viewers that will allow investors to view and analyze XBRL data. At this point, companies will have little excuse not to provide their financial statements in XBRL and likely will face presssure from investors to do so.

The SEC’s objective is to convert EDGAR, which receives 700,000 documents and data sets each year, from a form-based electronic filing repository to a “dynamic real-time search tool with interactive capabilities,” the agency said in a statement.

“To date the SEC has not required companies to file their information in interactive format, largely because the XBRL labels haven’t all been completed, and because the SEC’s own database — nicknamed EDGAR — can’t yet utilize the extra capabilities of XBRL. The three contracts announced today will close that gap, paving the way for universal XBRL filings by companies,” said SEC Chairman Christopher Cox.

To achieve its objectives, the commission announced the following contracts:

• $48 million to Keane Federal Systems Inc. to modernize and maintain the EDGAR database to use interactive data. The initial contract term is three years, but may be extended for up to three additional one-year terms. Using XBRL and XML, the new system will let investors and analysts search not only forms, but across forms for particular pieces of information in them. Investors will be able to immediately download data into software like a spreadsheet. Users will also be able to have newly filed information delivered direct to their desktops using RSS feeds, ATOM and other automated Web tools. The commission said the new system will reduce the chances of errors in the data because there will be no need to rekey information. Investors also will not need to rely on third-party preparers to put filings information into a usable format.

• $500,000 to Rivet Software and Wall Street On Demand to develop free online tools to help investors read and analyze XBRL data on the SEC’s website. Cox said the tools would be open source to encourage private developers to build add-ons or new applications based on the SEC’s code.

• $5.5 million to XBRL US, Inc. to complete writing the XBRL code for U.S. GAAP financial statements. The commission expects the work will be completed in less than one year, which will then enable every public company in America to file XBRL data with the commission. Cox said funding this was vital to the competitiveness of America’s capital markets as similar work in other countries is already far advanced.

“Today’s announcement demonstrates the Commission’s firm commitment to interactive data and represents a significant milestone on the road to achieving that goal,” said Chairman Cox. “The new system will make it easier both to file information with the Commission, and to use it. For investors and analysts, it will represent a quantum leap over existing disclosure technologies. For companies, it will mean easier and less costly compliance with SEC requirements.”

The announcement would appear to be bad news for companies like EDGAR Online Inc. and 10-K Wizard. They have founded their businesses on making SEC filings easier to use on a paid subscription basis. However, the new XBRL data will also enable these companies to offer additional value-added analysis tools to their clients.

Of course, public companies may not be thrilled at the announcement either. Already saddled with regulatory burdens brought on by Sarbanes-Oxley legislation, they may balk at the prospect of yet another regulatory requirement. The careful wording and positioning of information in the SEC’s announcement suggests that the agency is sensitive to a corporate backlash.

However, one of the biggest benefits of XBRL is that it will enable managers to run their companies better. As much as XBRL helps investors get standardized information and individual data points immediately they are filed, managers can use XBRL inside their enterprises to get faster, more accurate, platform-independent data on their operations’ performance anywhere in the world.

It is clear that the SEC doesn’t want to upset the corporate constituency. During his press conference (listen to the webcast) Cox was asked twice if the SEC would make XBRL and XML “mandatory.” He skirted the issue rather skillfully. But he made it clear that once the project is complete, there would be no more barriers to making XBRL filings mandatory. He said they would cross that bridge when they come to it.

Here’s how I look at it: Currently, around 30 companies have volunteered to file in XBRL in the SEC’s pilot program. Clearly, volunteerism isn’t going to get all companies to file in XBRL. So is the SEC spending $54 million for nothing, or is the plan to mandate the format?

After today’s announcement, it seems foolish to be complacent, downplay or bet that XBRL is not going to be compulsory.

XBRL has arrived and there’s no going back. Whether you want to use the word “mandatory” or not.

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