NEW YORK - As the world economy becomes increasingly connected, communicating important financial information, such as income statements, cash flow, balance sheets and mutual fund returns, would be all but impossible without a common language.
The U.S. is about to adopt eXtensible Business Reporting Language (XBRL) as the standard for reporting financial information, pending approval from the Securities and Exchange Commission.
At deadline, the SEC's endorsement was expected to be handed down imminently, a decision that many consider critical since U.S. financial markets, for all of their sophistication, breadth and depth, are lagging even emerging markets on XBRL initiatives.
Certainly, SEC Chairman Christopher Cox has made XBRL one of his crowning glories, and while he has not championed many mutual fund issues that lingered in his first years as SEC chair, most notably independent directors and shareholder proxies, he has come to the forefront and spoken very publicly on XBRL.
XBRL, an extension of the SEC's EDGAR (Electronic Data Gathering, Analysis and Retrieval System) regulatory filing initiative of the early 1990s, "is a global language that knows no national boundaries," said Brian G. Cartwright, general counsel for the SEC. "With it, you can readily display financial statements and related information in your own language, even if the financial statements were prepared in another language."
Cartwright calls XBRL the equivalent of putting bar codes on financial data, "except XBRL tags are like bar codes on steroids because they are linked through the taxonomy to so much useful information."
Instead of treating financial information like a block of text, XBRL provides a tag for each individual item of data. Computers can read these tags and allow users to sort the data using software applications like Microsoft Excel.
"It doesn't take a lot of imagination to envision that widespread adoption of XBRL is going to lead to the development of a lot of cool software to enable investors to exploit all that data and all that information in countless useful ways," he said.
New York-based EDGAR Online Inc. has jumped at the opportunity to become an XBRL niche player. For the past several years, EDGAR Online staff have been creating a huge archive of data sets dating back 10 years.
"EDGAR Online will be a company that transforms the industry," predicted Philip Moyer, the firm's president and CEO. "We believe there is an opportunity across all asset classes to provide transparency.
EDGAR Online provides access to SEC filings as well as other fundamental data, institutional holdings, insider trades, IPO/SPO registrations, and access to global annual reports and conference call transcripts. Everything is provided online, in an XBRL format.
"Up until 1993, if you wanted to get a report, you had to call the company and ask every quarter," Moyer said. "In 1993, the government created a central repository for financial information. By 1996, all companies in the U.S. were filing using EDGAR."
Eighty percent of countries outside the U.S. still don't have central repositories, he said, which would put the U.S. markets at a distinct competitive advantage, except Japan, which is known for being technologically ahead of the curve, and China, which is emerging as a dominant world power and doing everything possible to achieve that. Both are already far ahead of the U.S. on XBRL, experts said.
"Financial information about equities is like oxygen," Moyer continued. "Today, we take for granted access to income/outflow statements, but many large data aggregators are still typing this data by hand."
EDGAR Online, which is structured around Microsoft Excel, has data sets for all 12,401 publicly traded companies in the U.S., with as many as 6,000 data elements for each firm. Additionally, EDGAR Online has collected data on 1,500 public companies in China, with up to 3,500 data elements per company.
The Power to Excel
During a quick demonstration at EDGAR Online's Manhattan headquarters recently, Rob Krugman, supervisor of product development for EDGAR Online, zipped through several spreadsheets of publicly traded companies, comparing cash flows, balance sheets, income statements and shareholder equity, all updated to the minute. The sophistication, Krugman said, is right up mutual and hedge fund portfolio managers' alley.
It is not, however, something for the common man, which is a point, nonetheless, that SEC Chairman Cox has made.
With a few simple clicks, a proficient Excel user can use the system to compare things like casino revenues and exposure to real estate by banks from around the world.
"To be really proficient, you have to have a given knowledge of Excel," Krugman said. "People who do this for a living live in Excel. The idea is to make this as painless as possible."
Krugman said the handful of customers who are at an advanced level can use the program as a starting point for a much more sophisticated comparison.
Despite efforts of the U.S. to stay at the front of the business world, global businesses and foreign regulators are already far ahead of U.S. efforts to make the XBRL language mandatory.
The China Securities Regulatory Commission and the Shanghai Stock Exchange require listed companies to file their quarterly, half-year and annual reports using XBRL, Cartwright said, as well as Japan's Financial Services Agency and regulators in South Korea.
"It's not too hard to envision the day in the not too distant future when investors worldwide will be able to access, analyze and compare the financial statements of companies around the world using globally accepted tagging and accounting standards," Cartwright said.
"Any day now, we expect the SEC to mandate XBRL coding," Moyer said.
Until then, coding company filings in XBRL is voluntary and must be done in addition to normal EDGAR requirements.
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