New York–The U.S. Securities and Exchange Commission adopted a rule proposal last week that will mandate interactive data filings of public companies’ SEC reports, beginning this year for large cap firms. The new standard will have significant implications for the research industry, ranging from research techniques and processes to research distribution.
The SEC’s New XBRL Requirements
The new rule will require public companies registered with the SEC to report financial statements using eXtensible Business Reporting Language (XBRL), a form of the general purpose mark-up language XML. 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.
If adopted, the SEC’s proposed schedule would require companies using U.S. Generally Accepted Accounting Principles with a worldwide public float over $5 billion (approximately the 500 largest companies) to make financial disclosures using XBRL for fiscal periods ending in late 2008. The first XBRL data would be made public in early 2009.
The remaining companies using U.S. GAAP would provide this disclosure over the following two years. Companies using International Financial Reporting Standards as issued by the International Accounting Standards Board would provide this disclosure for fiscal periods ending in late 2010. The disclosure would be provided as additional exhibits to annual and quarterly reports and registration statements. Companies also would be required to post this information on their websites.
Companies filing under the proposed rule that use U.S. GAAP will use upgraded data tags issued April 28, 2008, by XBRL US, Inc. that were developed based on U.S. GAAP and on the review of hundreds of actual SEC filings. The SEC’s EDGAR system will accept test filings using a February 11 version of these tags later this month, with the final April 28 version of the tags becoming usable in June. In addition, an interim system is expected to be announced shortly that will enable companies immediately to provide interactive data submissions to the SEC using the April 28 version of the tags.
XBRL & RIXML
The SEC’s action will give a boost to a related initiative to implement a standard XML tagging scheme for investment research. The initiative, known as Research Information eXchange Markup Language (RIXML), is a consortium of buy-side firms, sell-side firms and vendors that have joined together to define an open standard for categorizing, tagging and distributing global investment research.
The RIXML standard provides extensive capabilities to tag any piece of research content, in any form or media with enough detail for end users to be able to quickly search, sort and filter aggregated research.
XBRL has been a long time coming. The SEC has had a pilot program in place for three years but only fifty U.S. companies used it, despite jawboning from Chairman Christopher Cox who adopted the initiative as a pet project. Although developed in the U.S., XBRL has fared better outside the U.S. For example, over 800 Chinese companies listed on the Shanghai exchange have been using XBRL since 2005.
Despite the long gestation period, many have ignored or denigrated the initiative. This will change quickly. XBRL will have major implications for the research supply chain, as it streamlines the financial reporting process. Inefficiencies that are created by the current reporting process will be eliminated. For example, valuable information from the notes and footnotes of financial statements is currently mined by investors and by specialist research firms such as forensic accounting, earnings quality and short ideas providers. As details in the notes and footnotes get tagged, value will be harder to generate.
Research processes will also change dramatically. The sell side outsources much of its junior analytic work to teams in India. These requirements will be dramatically reduced once financial data is tagged and easily (and quickly) incorporated in financial models. There are similar implications for information companies such as Bloomberg, Thomson Reuters, Factset, etc, which were slow to embrace the changes, but now paying close attention to both the XBRL and RIXML initiatives.
We also expect to see new categories of research providers spring up, designed to help investors utilize the new capabilities unleashed by XBRL and RIXML. We’ll cover this more extensively in a future blog posting.
The public comment period on the proposed rule will extend 60 days after publication in the Federal Register. The SEC’s press release can be viewed at: